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Capital  To-Day 

A    Study    of    Recent 
Economic  Development 


By 

Herman  Cahn 


r 


G.  P.  Putnam's  Sons 

New  York  and  London 
ttbe    Iknicfterbocker    iPress 

1915 


Copyright,  igrs 

BY 

HERMAN   CAHX 


Zbc  Y<nicl;erbocl;er  preee,  Hcxo  Jforli 


SOI 


MY    DAUGHTER 

ANITA  C.  BLOCK 


PREFACE 

The  following  study  has  been  written  with  special 
reference  to  the  present  economic  situation  in  the 
United  States,  the  essential  features  of  which  have 
been  developed  since  the  Civil  War.  But  as  the 
laws  underlying  the  capitalist  mode  of  production 
and  its  tendencies  are  the  same  everywhere,  such 
special  reference  to  one  country  partakes  of  the  char- 
acter of  an  illustration  of  conditions  obtaining  or 
shaping  themselves  to-day  in  all  advanced  industrial 
countries. 

The  most  momentous  developments  during  this 
period  are  the  centraUzation  of  control  of  capital 
and  the  modification  of  the  money  system.  The 
latter  is  by  far  the  more  portentous.  Yet  it  is  the 
former  which  occupies  public  attention,  while  silence 
reigns  concerning  the  menacing  money  question. 
True,  when  things  financial  are  at  sixes  and  sevens 
the  facts  are  published  and  the  means  for  overcoming 
the  emergency  discussed ;  but  the  theoretic  treatment 
of  this  important  subject  is  neglected  or  avoided  by 
those  whose  particular  function  it  is  to  study  such 
subjects  theoretically,  namely,  the  paid  specialists 
in  political  economy  at  the  universities. 

The  seemingly  mystic  nature  of  .money  cannot 
be  cleared  up  alone,  that  is,  disconnected  from  the 


VI 


Preface 


general  economics  of  the  commodity -producing  soci- 
ety, especially  of  its  capitalist  form.  Such  a  society 
exists  only  by  the  exchange  of  the  products  of  indi- 
viduals; therefore  value  is  the  foundation  of  its  eco- 
nomics. The  theoretic  analysis  of  value  has  been 
the  work  of  the  great  economist  Karl  Marx.  But, 
some  readers  may  say,  almost  every  economist  has 
his  own  theory  of  value.  Such  a  bewilderment  of 
mind  in  our  own  time  is  tolerated  only  in  that 
discipline  which  treats  of  the  material  interests  of 
different  classes.  The  investigators  in  the  natural 
sciences  can  afford  to  emplo}''  methods  and  proofs 
which,  consciously  or  unconsciously,  are  dictated 
by  a  theory  of  knowledge  or  human  understanding. 
Are  human  affairs  then  the  only  thing  closed  to  sci- 
entific understanding,  the  only  thing  in  which  truth 
cannot  be  positively  distinguished  from  untruth, 
and  regarding  which  there  may  therefore  exist  differ- 
ent theories?  If  the  Marxian  theory  of  value  can 
be  tested  by  the  rules  of  science,  based  on  the  theory 
of  understanding,  then  all  deviating  theories  of  value 
are  unscientific  and  false.  As  a  matter  of  fact  the 
latter  have  merely  the  "marginal  utility  "  of  a  barrier 
against  the  spread  of  scientific  economics. 

The  foregoing  considerations  are  responsible  for 
the  form  of  this  book.  Obviously  it  was  necessary 
to  start  with  an  exposition  of  the  foundation  of  all 
knowledge.  Armed  with  this  understanding  the 
reader  himself  will  be  able  to  judge  whether  Marx's 
method  was  scientific,  and  whether  or  not  in  the 
further  sequence  of  facts  submitted  by  me  I  have 
been  successful  in  following  his  method. 


Preface  vii 

Shortly  after  the  completion  of  my  manuscript 
occurred  the  outbreak  of  the  great  war.     It  brought 
with  it  economic  perturbations  which,  in  spite  of  the 
fact  that  they  have  been  partly  overcome  at  this 
writing,    have   left    behind    them   their   portentous 
symptomatic  significance.     Such  were  the  precipi- 
tous fall  of  stock  exchange  securities  and  the  closing 
of  the  world's  stock  exchanges  to  prevent  further 
official  depreciation ;  the  dropping  of  the  gold  reserve 
of  the  Bank  of  England  in  the  course  of  a  few  days 
from  about  52%  to  14%;  the  decrees  of  moratoria 
or  suspension  of  the  laws  for  the  collection  of  debts, 
including  bank  deposits,  almost  all  over   the  world, 
except  the  United  States;   the  practical  cessation  of 
foreign  exchange  as  a  medium  for  settling  obliga- 
tions, the  rates  for  sterling  having  risen  in  New  York 
at  one  time  to  $6  @  $7 ;  the  suspension  of  discounting 
by  the  English  banks  and  its  resumption  by  them 
under  guaranty  of  payment  of  the  private  bills  by 
the  government,  which  also  assumed  the  shipping 
risk  on  English  commerce;  the  large  issues  of  circu- 
lating notes  in  various  countries,  those  of  the  Reichs- 
bank  increasing  between  July  23d  and  August  31st 
from  $472,500,000  to  $1 ,058,500,000  while  its  metalHc 
stock  fell  off  sHghtly,  those  of  the  Bank  of  France 
increasing  from  6683  million  francs  on  July  30th  to 
9299  millions  on  October  1st;  the  subsequent  move- 
ment of  exchange  against  neutral  as  well  as  belligerent 
European  countries,  so  that  for  instance  Germany 
and  Italy  could  for  some  time  past  have  saved  one 
million  dollars  out  of  every  eight  of  the  cost  of  their 
purchases  in  the  United  States,  had  they  been  willing 


viii  Preface 

to  come  forward  with  their  gold;  the  universal  in- 
dustrial depression  which  in  important  industries  in 
the  United  States  reached  the  low  point  of  25%  of 
capacity. 

Some  of  these  happenings  have  been  referred  to 
in  this  book  as  contingencies.  But  I  flatter  myself 
with  the  hope  that  the  thoughtful  reader  will  be 
assisted  by  its  perusal  in  understanding  the  signifi- 
cance of  all  these  past  events,  as  well  as  of  others 
that  may  follow  in  the  future.  In  a  few  instances 
new  statistics  were  published  between  the  completion 
of  my  manuscript  and  the  printing  of  this  book.  Of 
these  I  have  not  hesitated  to  avail  myself. 

I  realize  that  the  dialectics  of  the  first  few  chapters 
make  somewhat  difficult  reading,  but  this  was  hardly 
avoidable. 

Herman  Cahn. 

New  York,  May,  1915. 


CONTENTS 
Introduction  ..... 

CHAPTER 

I. — Economics  a  Science    . 

II. — Marxian    Theory    of    Value    Briefly 
Stated        ..... 

III. — The     Contradictory    Functions     of 
Money     ..... 

(a)  Circulating  Medium 

(b)  Measure  of  Value 

(c)  Means     of     Deferred     Pay 

MENT      .... 

IV. — The  Handicaps  of  the  Money  System 

(a)  Wastefulness    of    the    Gold 

Basis     .... 

(b)  Inadequacy  of  Gold  Basis 

V. — Money  Tokens     .... 

(a)  General  Theory     . 

(b)  Proof  of  General  Theory  by 

Deviating    Hypotheses 

(c)  Silver  Tokens 
VI. — Money  of  Account 


PAGE 
I 

14 

28 

43 
43 
49 

53 
65 

65 
67 
84 
84 

95 
107 
114 


Contents 


CHAPTER  PAGE 

VII. — Totality  of  the  Money  System  in  the 

United  States  .         .         .         .149 

(a)  Conditions  Prior  to  Federal 
Reserve  Act  .         .         .         .149 

(b)  Federal  Reserve  Act     .         -155 
VIII. — The  Cycle  of  Industrial  Capital  .         .     167 

IX. — The  Mystery  of  Capitalism         .  .186 

X. — Fictitious  Capital        ....     209 

(a)  Transformation  of  Profit- 
Bearing  TO  Interest-Bearing 
Capital    .....     209 

Q))     Capitalization      Applied      at 

the  Source       ....     234 

XI. — The     Concentration     of     Industrial 

Capital   ......     251 

Xll. — The   Concentration   of   Money   Capi- 
tal ......     284 

XIII. — The  Unified  Capital  and  Conclusion.     307 


Capital  To-Day 


Capital  To-Day 


INTRODUCTION 

The  economic  developments  of  overshadowing 
importance  produced  by  the  last  fifty  years  are 
the  high  degree  of  concentration  of  capital  at- 
tained in  the  leading  industrial  countries  of  the  world, 
the  United  States  and  Germany,  and  the  creation  of 
a  vast  amount  of  nominal  money  consisting  of  tokens 
and  bank  deposits,  all  of  which  represent  gold,  not- 
withstanding the  non-existence  of  the  latter  as  their 
counterpart. 

It  is  to-day  plainly  observable  that  concentration 
of  capital  tends  to  increase  the  control  of  the  social 
forces  of  production  by  the  capitalist  class.  The 
question  is  whether  this  tendency  can  continue  to 
operate  also  in  the  future  as  a  result  of  continued 
concentration,  or  whether  there  exist  factors  which 
will  at  a  certain  stage  of  development  of  the  industrial 
countries  halt  the  further  progress  of  capitalist  con- 
trol of  the  productive  forces. 

The  increase  of  control  so  far  gained  by  the  capi- 
talists appears,  for  the  time  being,  as  a  refutation  of 
Marx's  prediction  that  they  would  ultimately  reach 


2  Capital  To-Day 

a  state  of  inability  to  cope  with  the  social  forces  of 
production  growing  irresistibly  under  the  compul- 
sion of  competition.  What  he  apprehended  was  that 
this  inability  would  lead  to  unbearable  conditions 
before  a  high  degree  of  concentration  of  capital  could 
be  accomplished  by  the  competitive  method,  then 
the  main  operating  force.  The  industries  of  Eng- 
land, in  his  time  the  only  industrial  country  in  the 
world,  had  grown  up  spontaneously  from  small  be- 
ginnings and  were  then  owned,  as  were  also  the  banks, 
by  individuals  and  partnerships,  many  of  which, 
to  be  sure,  had  grown  very  rich.  The  competitive 
struggle,  resulting  in  the  survival  of  a  few  giants, 
was  evidently  to  be  long  and  painful,  unless  ter- 
minated by  the  intelligent  action  of  the  proletariat. 
We  shall,  however,  find  that  among  the  advanced 
industrial  countries  of  the  present  day  it  is  only  the 
United  States  in  which  economic  conditions  have 
developed  that  may  present  the  possibility  of  an 
exception  to  the  fulfillment  of  that  prediction. 
Fifty  years  ago  this  country  had  only  just  emerged 
from  colonial  conditions,  taken  the  reins  of  govern- 
ment out  of  the  hands  of  the  free-trade  agrarians, 
and  placing  them  into  those  of  the  protectionist 
industrial  capitalists,  begun  its  wonderful  industrial 
career. 

Since  that  time,  under  customs  tariffs  designed 
originally  as  a  protection  against  England's  well- 
established  industries,  we  have  seen  the  rise  of  the 
United  States  and  Germany  to  leadership  in  the 
organization  of  industrial  and  banking  capital, 
although    England    still    remains   the   international 


Introduction  3 

financial  center  and  clearing  house.  The  new  in- 
dustrial countries  were  spared  the  early  stages  of 
industrial  evolution  in  England  and  could  start  their 
plants  at  once  on  a  scale  called  for  by  modem  tech- 
nique. When  success  was  assured,  the  tariffs,  which 
had  been  instituted  for  the  protection  of  "infant 
industries,"  furnished  the  condition  for  something 
entirely  different — the  combining  of  industries  into 
trusts  or  kartells.  The  present  purpose  of  protective 
tariffs  is  to  secure  for  the  combinations  monopolistic 
extra  profits  in  the  home  markets,  thereby  enabling 
them  to  export  the  surplus  of  a  production,  conducted 
without  limits  as  to  the  scale  necessary  to  attain  the 
minimum  cost  of  their  products,  at  whatever  might 
be  the  world  market  price,  even  if  it  entailed  a  loss. 
Both  the  United  States  and  Germany  have  evolved 
a  high  degree  of  identity  of  banking  and  industrial 
capital  and  both  countries  are  still  on  the  ascending 
curve  of  capitalist  development.  Nothing  proves 
the  latter  statement  better  than  the  fact  that  Ger- 
many has  ceased  to  be  a  country  of  emigration  and 
has  instead  become  one  rather  of  immigration,  as 
also  the  United  States  continues  to  be. 

So  far  the  economic  development  of  both  countries 
has  been  parallel.  Is  it  possible  for  this  parallelism 
to  continue? 

Large-scale  production  by  any  nation  is  dependent 
on  two  conditions:  first,  the  assurance  of  the  supply 
of  its  raw  and  accessory  materials;  second,  a  sufficient 
market  for  its  products. 

Only  territorially  very  extensive  economic  units 
may  possibly  be  so  situated  as  to  approximate  these 


4  Capital  To-Day 

conditions.  In  this  most  important  respect  the 
contrast  between  this  country  and  Germany  could 
scarcely  be  much  greater.  And  this  remark  holds 
good  also  in  comparing  this  country  with  the  other 
new  industrial  countries,  all  of  whom  are  under  the 
necessity  of  maintaining  protective  tariffs  at  least 
as  high  as  the  leading  nations. 

The  United  States  is  a  country  of  continental 
dimensions  producing,  or  able  to  produce,  all  impor- 
tant raw  and  accessory  materials  with  few  exceptions 
(such  as  silk,  tin,  and  rubber).  It  has  a  large  and 
growing  population  accustomed  to  a  high  standard 
of  comfort.  On  such  a  basis  an  orderly  continu- 
ance of  the  process  of  concentration  and  increasing 
control  of  the  forces  of  production  by  the  capitalist 
class  must  be  admitted,  so  far  as  the  merely  tech- 
nical conditions  of  industry  are  concerned. 

Germany,  on  the  other  hand,  is  a  country  so  small 
in  area  that  it  would  only  equal  Texas  after  a  slice 
as  large  as  New  England  had  been  cut  off  that  State. 
Aside  from  coal  and  iron  it  is  deficient  in  all  important 
raw  and  accessory  materials.  Its  home  market  has 
been  growing,  but  has  narrow  limitations. 

How  to  overcome  the  precariousness  of  the  supply 
of  materials  and  to  secure  a  reliable  market,  commen- 
surate with  production  on  the  largest  scale,  is  there- 
fore Germany's  problem.  But  a  market,  in  the  mind 
of  the  German  trust  magnates,  is  no  longer  identical 
with  the  old-fashioned  conception  of  a  place  where 
you  try  to  sell  a  little  cheaper  than  your  competitor. 
They  have  outgrown  the  idea  of  competition  and 
become  accustomed  to  monopolistic  extra  profits. 


Introduction  5 

Also  these  extra  profits  seek  investment,  not  to  be 
lent  out  to  foreigners  at  simple  interest  in  the  manner 
of  the  French  and  the  Dutch,  and  to  a  certain  extent 
by  the  English,  but  as  industrial  capital  operating 
in  more  backward  countries  to  the  exclusion  of  com- 
petition. A  leading  r61e  is  played  in  this  movement 
of  industrial  capital  by  the  metal  and  other  heavy 
industries  which  export  to  such  countries  rails  and 
rolling  stock  for  railroads  and  tramways,  machinery 
and  chemicals  for  the  mining  of  metals  and  other 
minerals,  apparatus  and  wire  for  electrical  plants, 
etc.  Thus  these  industries  have  become  most  effi- 
cient agents  for  the  introduction  of  the  capitalist 
mode  of  production  into  every  part  of  the  world,  and 
have  gained  the  most  influential  position  in  shaping 
the  economic  policies  of  their  countries.  For  the 
part  they  play  in  revolutionizing  the  world  the  textile 
industry,  up  to  fifty  years  ago  the  leader,  was  not 
adapted, — its  products  having  been  adapted  only 
for  exportation  as  merchandise,  and  not  for  exporta- 
tion as  capital. 

But  permanent  industrial  investment  requires  an 
entirely  different  degree  of  security  from  that  of 
commerce  in  which  the  relation  is  ended  by  the  mere 
changing  hands  of  commodities  and  money.  That 
degree  of  security  can  be  obtained  only  by  the  exercise 
of  control  over  the  regions  to  which  products  or 
money  are  to  be  exported  as  capital  investments, 
aside  from  the  exportation  to  them  of  products  as 
merchandise  on  a  non-competitive  price  basis. 

This  is  the  modern  animus  of  industrial  countries 
for  the  acquisition  of  colonies  and  the  annexation  of 


6  Capital  To-Day 

contiguous  territory.  To  expansion  by  these  means 
have  been  added  protectorates,  spheres  of  influence, 
financial  control  of  dependent  countries,  and  special 
concessions,  contracts,  and  treaties  as  collateral 
conditions  of  loans.  It  needs  political  power  to 
back  up  a  policy  by  which  the  former  commercial 
competition  has  been  changed  into  political  competi- 
tion in  which  military  power  lends  support  to  the 
demand  of  economic  advantages,  as  well  as  the  pro- 
mise of  protection  against  others.  IModern  industrial 
states  must  therefore  above  all  else  be  "powers." 
At  present  the  "powers"  stand  at  the  gates  of  China, 
their  eyes  greedily  directed  at  her  fabulous  resources, 
but  each  power  waiting  the  favorable  moment  for 
compassing  the  undoing  of  its  competitors  in  order 
to  grab  as  much  as  possible  of  this  greatest  prize  in 
the  world. 

The  customs  barriers  erected  around  every  coun- 
try by  the  flood  tide  of  capitalism  in  the  last  half- 
century  and  the  striking  success  of  protectionism, 
especially  in  Germany,  produce  a  favorable  milieu 
for  engendering  a  nationahstic  spirit  (as  evidenced 
by  the  ever-increasing  armaments)  which  is  a  stand- 
ing menace  to  the  peace  of  Europe.  The  spirit  of 
national  antagonism  has  again  decidedly  gained  the 
upper  hand  over  the  cosmopolitan  tendencies  of 
the  bourgeoisie  of  the  free-trade  era  of  Cobden  and 
Bright. 

It  is  therefore  evident  that  an  orderly  development 
of  industrial  and  financial  concentration  in  Germany 
and  the  other  aspiring  industrial  countries  of  Europe, 
a  development  such  as  is  technically  possible  in  the 


Introduction  7 

United  States,  meets  with  insurmountable  political 
obstacles.  With  regard  to  all  European  industrial 
countries  no  factors  have  developed  since  Marx  to 
modify  his  prediction  of  the  coming  inability  of  the 
capitalist  class  to  cope  with  the  forces  of  production. 

But  even  in  the  United  States  the  attainment  of 
the  ultimate  goal  of  the  present  centralizing  tenden- 
cies, namely  capitalist  oligarchy,  though  technically 
unimpeded,  is  likely  to  be  crossed  by  developments 
which  are  in  store  in  relation  to  the  financial  mechan- 
ism of  all  capitalist  countries,  including  the  United 
States. 

The  development  of  this  mechanism  has  reached 
a  pass  where  it  has  become  the  most  momentous  fact 
in  economics.  Money  has  been  a  fundamental  and 
indispensable  tool  ever  since  use-values  were  pro- 
duced to  any  considerable  extent  for  exchange, 
instead  of  for  consumption  by  the  family  or  com- 
munity, as  theretofore.  The  commodity-producing 
society  effected  first  the  social  division  of  labor  (the 
distribution  of  the  products  being  effected  by  ex- 
change) and  later,  during  its  capitalist  period,  the 
partial  socialization  of  the  means  of  production. 
This  socialization  consists : 

First,  in  the  working  out  of  an  average  profit  rate 
for  all  industrial  capital,  so  that  the  profit  of  each 
special  capital  or  sphere  is  not  determined  by  its 
own  rate  of  surplus  value,  but  by  the  total  surplus 
value  produced  by  the  total  industrial  capital,  in 
which  each  special  capital  participates  pro  rata,  as 
in  a  social  dividend.  The  fact  that  the  social  divi- 
dend has  more  recently  been  apportioned  according 


8  Capital  To-Day 

to  two  average  rates  of  profit,  one  for  competitive 
capital  and  the  other  for  monopoHes,  is  not  to  be 
interpreted  as  reactionary  and  as  nullifying  socializa- 
tion, but  on  the  contrary  as  the  powerful  lever, 
employed  by  evolution,  to  advance  the  socialization 
of  the  means  of  production  to  a  higher  form  by  con- 
centration. 

Second,  in  the  function  of  the  banks  as  agents  for 
placing  the  social  money  capital  at  the  disposal  of 
the  industrial  capitahsts,  so  that  the  lenders  are  not 
the  owners  of  the  money.  It  is  the  depositors' 
money  which  the  banks  are  lending.  On  the  other 
hand  the  borrowers  of  the  great  bulk  of  the  money 
are  not  its  users.  The  users,  from  the  president  of  a 
corporation  down  to  the  flagman  or  floor-sweeper, 
are  only  employees. 

But  social  production,  without  social  control,  is 
possible  in  no  other  way  than  by  the  social  recognition 
of  a  single  exclusive  commodity  as  the  standard  of 
value  and  the  universal  medium  of  exchange.  This 
recognition  has  been  the  only  absolutely  social  act 
of  the  human  race.  By  this  act  gold  became  the 
world's  money. 

But  the  above-mentioned  two  functions  of  money 
are  contradictory,  the  first  requiring  scarcity,  the 
second  abundance.  The  contradiction  did  not  mani- 
fest itself  with  any  severity  during  the  long  period 
of  small  production.  Nor  even  when  the  needs  of 
capitalist  machine  production  on  a  large  scale  led 
to  the  invention  of  paper  money  and  of  bookkeeping 
money,  called  bank  deposits,  as  an  addition  to  the 
required,  but  delinquent  gold,  did  the  purely  nominal 


Introduction  9 

money  excite  any  particular  suspicion.  Marx,  of 
course,  distinguished  between  the  reality  and  the 
fiction,  and  also  recognized  the  latter's  capacity  for 
producing  crises.  Yet  it  was  impossible  in  his  Eng- 
land of  the  sixties,  when  bookkeeping  money  was  in 
its  infancy,  to  suspect  that  this  infant  would  grow 
up  into  a  Frankenstein,  threatening  to  destroy  its 
maker,  and  that  it  was  just  the  necessity  of  com- 
modity money  which  would  prove  to  be  the  most 
fatal  defect  of  the  commodity-producing  society. 
The  development  of  the  financial  mechanism  since 
then  makes  it  plain  that  the  phenomenon  of  money, 
the  basis  of  every  form  of  commodity-producing 
society,  is  of  more  fundamental  and  momentous 
import  than  that  of  the  mere  accumulation  and  con- 
centration of  capital,  which  latter  phenomenon  ac- 
companies only  the  latest  development  of  that  society, 
the  capitalist  system.  When  the  financial  mechanism 
gives  way  under  the  strain  of  its  inherent  contradic- 
tions, the  only  remaining  obstacle  will  have  been 
removed  to  the  social  control  of  social  production. 

Now,  this  commodity  money,  gold,  is  woefully 
insufficient  in  every  country  for  the  performance  of 
its  functions  of  medium  of  exchange  and  means  of 
deferred  payment,  the  latter  being  an  additional 
function  added  in  modern  times.  These  two  func- 
tions are  again  contradictory,  but  we  need  not  enter 
into  details  at  present. 

In  spite  of  the  tariff  walls  with  which  the  capitalist 
countries  have  surrounded  themselves,  they  were 
never  so  interdependent  on  each  other  as  they  are 
to-day.     Especially  are  they  all  extremely  sensitive 


lo  Capital  To-Day 

to  any  disturbance  of  a  financial  nature  in  one  among 
them.  This  is  so,  because  they  all  stand  in  relation 
to  each  other  not  only  as  sources  of  materials  and 
customers  for  products,  in  spite  of  tariffs,  but  also 
because  the  money  capitalists  everywhere  make 
their  investments  with  little  regard  to  country. 

All  these  countries  are  mortally  afraid  of  parting 
with  any  material  part  of  their  stock  of  gold.  This 
is  largely  concentrated  in  the  central  bank  of  each 
countr>%  partly  in  order  to  sustain  the  social  faith 
in  the  parity  with  it  of  various  kinds  of  token  money, 
and  partly  for  the  emergency  of  an  adverse  balance 
of  international  obligations.  In  some  countries  the 
central  bank's  gold  reserve  is  looked  on  besides  as  a 
possible  emergency  fund  in  case  of  war  to  serve  for 
the  purchase  in  foreign  countries  of  army  supplies 
and  foodstuffs.  The  business  of  the  other  banks 
consists  mainly  in  receiving  deposits  and  employing 
them  as  loan  capital  by  discounting  the  bills  receiv- 
able of  manufacturers  and  merchants. 

When  the  alarm  sounds,  either  in  the  due  course 
of  the  cycle  of  crises,  inseparable  from  competitive 
capitalism,  or  in  consequence  of  the  outbreak  of  war, 
the  first  thought  of  the  productive  and  mercantile 
capitalists  is  to  get  possession  of  the  money  which 
they  have  on  deposit  in  the  banks.  This  cannot 
be  done  by  drawing  a  check  on  the  bank  and  deposit- 
ing the  same  in  another  bank.  It  must  be  drawn  in 
cash.  But  the  banks  of  deposit  keep  on  hand  as 
little  unproductive  money  as  possible  and  now  turn 
to  the  central  (national)  bank  for  the  re-discounting 
of  their  bulging  portejeuilles .     In   an   endeavor   to 


Introduction  ii 

keep  the  demand  for  re-discount  within  bounds  the 
central  bank  doubles  or  trebles  its  discount  rate. 
But  the  dire  need  of  the  banks  of  deposit  breaks 
down  this  barrier  and  threatens  to  deplete  the  central 
bank  of  its  holdings  of  paper  currency  and  even  of  its 
gold  reserve.  At  this  juncture  governments  are 
obliged  to  decree  the  abrogation  of  laws  fixing  the 
limit  of  note  issues  by  the  central  banks  and  to  open 
the  gates  wider  for  the  issue  of  fiat  money  which  they 
endow  with  the  quality  of  a  forced  currency.  Under- 
standing well  enough  what  a  great  inflation  would 
mean  to  the  national  economy,  if  not  to  the  social 
fabric,  the  governments  reduce  the  need  of  money 
by  decreeing  moratoria,  i.  e.,  the  suspension  for  a 
certain  period  of  the  legal  enforcement  of  private 
money  obligations,  including  bank  deposits,  except 
such  percentage  of  the  latter  as  may  be  fixed  by 
governments  both  for  commercial  and  savings  banks. 
During  the  regime  of  the  moratorium  the  further 
extension  of  merchandise  credits  must  be  in  the  main 
suspended,  as  it  becomes  too  difficult  to  distinguish 
between  the  solvent  and  insolvent  buyer.  There- 
fore the  moratorium  actually  means  just  this,  that 
a  great  reduction  of  production  is  considered  the 
lesser  evil,  compared  with  the  widespread  bankruptcy 
that  would  follow  were  payments  to  be  enforced. 

The  social  faith  in  credit  is  shaken.  There  seems 
to  be  nothing  real  but  gold.  Everybody  tries  to 
hoard  as  much  of  it  as  possible.  Paper  money  is 
looked  at  askance  by  many.  On  the  stock  exchanges 
paper  titles  fall  tremendously.  In  his  fear  of  much 
greater    depreciation    to    come    only    one   thought 


12  Capital  To-Day 

obsesses  the  money  capitalist:  sell  as  quickly  as 
possible!  And  the  cables  transmit  an  avalanche  of 
selling  orders  to  the  New  York  stock  exchange. 

Quickly  the  situation  here  likewise  becomes  criti- 
cal. What  is  to  become  of  the  value  of  our  paper 
currency,  if  we  are  to  ship  gold  against  all  the  Ameri- 
can securities  which  Europe  might  be  willing  to  un- 
load here?  And  if  this  debacle  of  quotations  is  to 
continue  what  is  to  become  of  the  solvency  of  our 
banks,  whose  assets  largely  consist  of,  or  have  been 
loaned  against,  stock  exchange  securities — solvency 
not  in  the  sense  of  the  economist  who  knows  that  it 
cannot  exist,  who  knows  that  insolvency  is  the  normal 
condition  of  all  banks  in  the  world,  but  solvency 
according  to  the  rules  laid  down  for  bank  examiners. 
There  is  only  one  escape  from  these  two  terrible 
contingencies  and  their  consequences — the  annihila- 
tion of  the  market  for  securities,  the  closing  of  the 
stock  exchange. 

But  what  a  costly  escape !  It  resembles  the  Euro- 
pean escape  by  moratorium  in  that  it  is  effected  at 
the  cost  of  a  partial  paralysis  of  industry.  The  con- 
version, where  needed,  of  revenue  titles  (stocks, 
bonds,  short  term  notes)  into  money  and  as  such 
into  industrial  capital,  for  which  conversion  the 
stock  exchange  is  the  agency,  stagnates. 

The  foregoing  is  far  from  being  a  vision  of  capital- 
ist society  in  its  death  struggle.  It  presents  merely 
the  sequence  of  the  symptoms  during  an  acute  attack 
of  a  disease  which  is  congenital  to  the  capitalist 
system,  from  which  the  United  States  is  not  exempt, 
in  spite  of  its  industrial  advantages.     Every  one  of 


Introduction  13 

these  symptoms  has  already  been  recorded  in  the 
history  of  crises.  But  the  attacks  of  the  disease 
must  grow  more  virulent  in  the  future  under  the 
growing  strain  of  the  contradictions  of  money. 

It  follows,  then,  that  the  orderly  development  of 
capitalist  society  in  the  United  States,  while  possible 
industrially,  is  dependent  not  only  on  the  develop- 
ment of  its  own  money  system,  but  on  that  of  inter- 
national finance. 

For  an  understanding  of  these  subjects  we  must 
turn  to  Economics,  the  science  which  treats  of  the 
laws  governing  the  production  and  exchange  of  the 
material  means  of  life  in  human  society. 


CHAPTER  I 

ECONOMICS  A   SCIENCE 

In  the  realm  of  the  natural  sciences  any  new  dis- 
covery must  submit  to  the  test  of  universally  rec- 
ognized rules  of  proof,  by  means  of  which  not  only 
the  result  claimed  but  also  the  methods  employed 
in  arriving  at  the  result  may  be  verified.  The  re- 
quirements of  these  rules  of  proof  serve  to  preclude 
any  possibility  of  error,  sophistry,  or  mystery,  and 
that  discovery  which  has  stood  the  test  is  recognized 
by  all  men  as  an  established  scientific  fact.  Hence, 
while  scientists  may  entertain  different  hypotheses 
regarding  the  problems  on  the  solution  of  which  they 
are  engaged,  there  is  no  room  left  for  individual 
opinions  among  them  concerning  the  positive  results 
already  secured  by  the  various  natural  sciences. 
There  are  no  opposing  schools  of  chemistry,  as- 
tronomy, etc.,  and  we  do  not  read  that  in  relation 
to  gravitation  or  evolution  Mr.  A.  holds  one  view, 
while  Prof.  B.  differs  from  it,  and  Dr.  C.  denies 
altogether  that  such  phenomena  exist. 

All  over  the  world  the  universities  which  are  the 
appointed  institutions  for  the  dissemination  of  sci- 
entific knowledge  teach  the  identical  unquestioned 
facts,  so  far  as  the  natural  sciences  are  concerned. 


Economics  a  Science  15 

In  certain  other  departments,  however,  the  univer- 
sities maintain  courses  of  studies  to  which  the  apph- 
cation  of  the  same  rules  of  evidence  as  required  in 
the  case  of  the  natural  sciences  is  not  enforced,  but 
is  allowed  to  go  by  default.  Among  these  studies 
we  single  out  Philosophy,  History,  and  Economics 
as  directly  concerning  us  here. 

What  is  there  behind  this  difference  in  the  attitude 
of  the  world's  universities  toward  the  natural  sci- 
ences on  the  one  hand  and  toward  the  above-men- 
tioned three  studies  on  the  other  hand? 

In  the  first  place  be  it  noted  in  regard  to  Philosophy 
that  what  the  universities  are  teaching  is  not  a  history 
of  the  development  and  final  positive  outcome  of 
this  discipline,  which  would  be  a  highly  useful  pur- 
suit, but  they  persist  in  teaching  it  still,  the  same  as 
in  former  centuries,  as  a  source  of  understanding. 
In  other  words  the  universities  hold  on  to  two  sources 
of  understanding,  the  scientific  and  the  philosophic, 
and  this  dualism  leaves  them  free  to  range  the  various 
studies  under  one  head  or  the  other.  Thus,  while 
having  adopted  the  scientific  source  of  understanding 
for  each  individual  study  treating  of,  or  directly 
connected  with,  objects  in  nature,  they  have  chosen 
to  subordinate  History  and  Economics  to  Philosophy, 
thus  taking  the  ground,  or  at  least  implying,  that 
these  two  disciplines,  which  treat  of  human  society 
past  and  present,  are  not  subjects  capable  of  scientific 
analysis. 

Karl  Marx  has  said  that  Economics  is  capable  of 
being  analyzed  with  the  exactness  of  a  natural  sci- 
ence and  he  gave  to  the  world  the  amazing  proof  for 


'i6  Capital  To-Day 

this  statement  in  his  monumental  work  Das  Kapital, 
in  which  the  nature  of  the  social  processes  of  produc- 
tion and  circulation,  which  together  constitute  the 
social  alimentation,  are  disclosed.  It  is  evident  on 
every  page  that  Marx  consciously  observed  all 
rules  of  science,  although  he  omitted  to  explain,  just 
as  all  other  great  scientists  have  omitted  to  do,  how 
the  nature  of  the  human  mind  is  involved  in  scientific 
analysis  or  rather  in  human  understanding  generally. 
This  missing  feature  in  Marxism,  in  reality  its  foun- 
dation and  that  which  renders  its  economic  theory 
unassailable,  was  supplied  by  Joseph  Dietzgen  in  a 
thorough  and  systematic  manner  in  his  two  principal 
works,  The  Nature  of  Human  Brain  Work  and  The 
Positive  Outcome  of  Philosophy.  Therefore  in  order 
to  realize  fully  the  thoroughly  scientific  basis  of  Das 
Kapital  as  a  product  of  thinking,  it  is  necessary  first 
to  learn  from  Dietzgen  what  is  correct  thinking. 

For  thousands  of  years  men,  in  their  longing  to 
understand  the  world  they  lived  in,  and  aware  that 
their  senses  often  deceived  them,  turned  to  "pure 
reason,"  that  is,  reason  uninfluenced  by  the  senses, 
as  the  source  of  understanding.  Mankind  had  not 
yet  succeeded  in  supplementing  and  correcting  its 
endowment  of  senses  and  their  impressions  by  instru- 
ments and  processes,  more  sensitive  than  the  human 
sensory  organs.  For  instance  the  gauging  of  tem- 
perature by  our  sense  of  feeling  is  largely  subjective 
and  always  inexact,  therefore  unreliable;  the  inven- 
tion of  the  thermometer  substituted  for  this  purpose 
the  sense  of  sight  for  that  of  feeling  and  made  the 
measurement  of  temperature  objective  and  exact. 


Economics  a  Science  17 

While  thus  the  paucity  of  their  experiences  and 
the  distrust  of  their  senses  caused  the  great  thinkers 
to  rely  on  abstract  reasoning,  the  horizon  of  their 
thought  processes  was  further  limited  by  the  social 
conditions  with  which  they  were  surrounded  and 
which  they  conceived  as  static,  the  same  as  they  did 
all  phenomena.  These  social  conditions,  ever  since 
the  commodity-producing  society  had  evolved  out 
of  primitive  communism,  had  presented  a  dualism. 
The  Greek  philosophers  could  not  conceive  of  society 
as  consisting  of  anything  else  than  clearly  defined 
classes — a  leisure  class  to  rule  and  think  and  a  slave 
class  to  do  the  work.  The  essentially  identical  milieu 
of  social  dualism,  although  in  modified  form,  governed 
the  abstract  thinking  of  the  modem  philosophers. 
The  social  dualism,  conceived  as  eternal,  has  been  and 
remains  the  fountain-head  of  all  dualisms  supported 
by  the  philosophers,  such  as  mind  and  body,  matter 
and  force,  ethical  and  unethical.  Such  an  accepted 
and  unquestioned  dualism  we  find  to-day  in  the  phil- 
osophico-economic  conception  of  capital  and  labor. 

As  knowledge  increased,  the  results  arrived  at  by 
successive  philosophic  systems  were  successively 
found  to  be  at  variance  with  the  facts  of  nature  and 
of  history.  The  sciences  branched  off  from  the 
parent  philosophy,  which  originally  included  all 
intellectual  activity,  and  they  became  specialized 
as  distinct  pursuits,  each  in  its  sphere  setting  up 
its  own  tests  of  truth.  The  successes  of  the- sci- 
ences, contrasted  with  the  unreliability  and  barren- 
ness of  practical  results  of  philosophic  speculation, 
lessened  the  estimation  in  which  the  exercise  of  "  pure 


i8  Capital  To-Day 

reason"  had  been  held  and  reduced  the  function  of 
philosophy  more  and  more  to  an  inquiry  into  the 
nature  of  the  faculty  of  thought.  This  problem  was 
finally  solved  by  Dietzgen,  whose  work  (first  pub- 
lished in  1869)  concludes  the  history  of  philosophy, 
now  transformed  into  the  natural  science  of  the 
human  mind.  The  transformation  is  analogous  to 
that  of  alchemy  into  chemistry. 

The  quintessence  of  science  consists  of  the  dis- 
covery that  phenomena  are  not  static  and  existing  by 
themselves,  but  that  they  are  in  a  constant  change 
and  exist  only  through  the  action  of  one  thing  on 
another.  Thus  it  is  not  the  static  nature  of  a  tree 
to  be  green ;  if  we  recede  from  it  at  a  certain  speed, 
its  natural  color  is  red,  and  at  a  certain  greater  speed 
the  phenomenon  of  vision  of  the  tree  ceases  altogether. 
Our  senses  are  organs  developed  for  the  purpose  of 
being  acted  on  by  other  things.  To  our  tongue 
vinegar  tastes  sour,  but  the  phenomenon  of  acidity 
does  not  exist  in  the  vinegar  by  itself.  To  our  eyes 
vinegar  is  only  either  a  Hquid  or  a  soHd,  according 
to  the  temperature;  to  iron  or  eggshells  it  is  nothing 
but  a  solvent. 

The  brain  is  an  organ  produced  by  evolution  for 
the  performance  of  one  kind  of  work,  as  the  legs  are 
for  another.  The  work  of  the  brain  and  of  the  legs 
produce  the  same  toxin  of  fatigue.  We  are  as  con- 
scious of  our  thinking,  as  we  are  of  pain.  As  all 
phenomena  consist  of  the  action  of  one  thing  on 
another,  work  requires  material  to  work  upon.  What 
is  walking?  It  is  the  rhythmic  movement  of  the 
legs  on  some  solid  substance  from  one  place  to  an- 


Economics  a  Science  19 

other.  The  material  for  brain  work  is  furnished  by 
the  perceptions  of  the  senses.  But  each  sense  can 
only  perceive  that  for  which  it  has  been  adapted — 
the  eye  to  see  that  which  is  visible  in  an  object,  the 
ear  to  hear  that  which  is  audible  in  it,  etc.  The  faculty 
of  thought,  however,  has  everything  for  its  object. 
Yet  it  is  incapable  of  entirely  dissociating  the  object 
from  any  connection  with  anything  else,  because 
phenomena  consist  of  the  relations  of  things  with 
each  other.  These  innumerable  objects  and  rela- 
tions have  the  concrete  quality  of  being  perceptible 
by  our  senses,  but  they  also  have  the  abstract  quality 
of  being  thought  of  and  understood.  If  we  now  vary 
our  above  question  regarding  walking  and  ask: 
What  is  thinking?  we  can  answer  that  it  is  the  co- 
ordination or  generalization  of  the  perceptions  of 
the  various  senses,  including  in  these  perceptions 
the  faculty  of  thought  itself  as  a  material  fact. 

Generalization,  which  includes  simultaneously 
differentiation,  is  equivalent  to  systematization  and 
is  the  essence  of  conscious,  theoretical  understanding. 
As  soon  as  we  have  recognized  the  common  charac- 
teristics (which  includes  recognizing  their  diverging 
characteristics)  of  salt,  sand,  and  silver,  we  can 
generalize  them  all  as  minerals.  If  by  the  thought 
process,  based  on  sense  perceptions,  we  can  identify 
profit,  interest,  and  rent  as  differentiations  of  surplus 
value  or  unpaid  labor,  we  have  gained  that  much 
understanding  of  economics. 

Science  consists  of  the  generalization  of  concrete 
facts.  Its  mode  of  thinking  is  from  the  external, 
inward   to   the   mind:   it   is   inductive.     Philosophy 


20  Capital  To-Day 

draws  its  thoughts  from  the  mind  and  appHes  them 
outwardly:  its  mode  of  thinking  is  deductive.  Of 
course,  do  what  they  may,  men  cannot  get  away  from 
the  concrete  basis  of  their  thinking.  They  cannot 
think  transcendental  thoughts  or  create  transcen- 
dental images.  All  they  can  manage  to  do  is  to 
produce  arbitrary  combinations.  They  can  combine 
the  human  form  with  characters  of  animals  and 
produce  images  of  angels  and  devils,  or  fetiches 
before  which  they  prostrate  themselves.  They  can 
defend  as  absolute  and  final  a  form  of  society,  even 
more  sacred,  composed  of  a  strange  trinity, — capital, 
not  a  thing  at  all,  but  a  relation;  labor,  an  abstrac- 
tion; land,  with  its  lingering  odor  of  the  forest 
primeval, — which  trinity  divides  the  social  revenue. 
But  this  metaphysical  defense  cannot  get  away  from 
the  concrete  facts  that  capital  is  only  a  form  of 
ownership  of  the  concrete  means  of  production,  that 
labor  is  only  the  ghost  of  concrete  work  producing 
use-values,  not  wages,  and  that  the  land  is  cheated 
of  its  share  which  instead  goes  to  certain  persons 
known  as  landlords. 

If,  then,  deductive  thinking  without  previous 
induction  is  in  reality  a  physical  impossibility,  if 
"pure  reason"  actually  does  not  exist — then  how  is 
it  that  rehgion  did,  and  the  philosophical  method 
does,  arrive  at  untrue  results?  The  answer  is  that 
these  methods  of  thought  use  their  inductions  un- 
consciously, while  the  scientific  method  is  critically 
inductive.  Hence  the  materials  the  former  work  on 
are  insufficient  or  incongruous,  while  science  operates 
with  materials  brought  together  with  proper  discern- 


Economics  a  Science  21 

ment.  Science  is  based  on  the  theory  of  under- 
standing. Its  method  has  s^^stem;  the  philosophical 
method  has  not. 

Philosophy  had  been  striving  for  absolute  truth 
by  mere  thinking.  But  science  deals  with  phe- 
nomena and  it  has  discovered  that  they  are  in  a  con- 
stant state  of  change,  perishable  and  transitory, 
therefore  imperfect  and  contradictory.  How  then 
could  science  by  a  study  of  phenomena  hope  to  lead 
us  on  toward  the  goal:  absolute  truth?  Only  by 
directing  to  any  phenomenon  the  questions  as  to  its 
origin  and  its  contradictions  with  other  phenomena; 
in  other  words  by  applying  the  theory  of  evolution, 
and  the  materialistic  and  dialectic  mode  of  thought. 
Thus  it  is  found  that  all  phenomena  are  different 
appearances  of  the  interactions  upon  one  another  of 
the  imperfect  and  transmutable  parts  of  one  whole, 
the  all-embracing  universe,  the  one  perfect  existence. 
This  conception  of  phenomena  and  of  the  universe 
is  confirmed  in  physics  by  the  doctrine  of  the  inde- 
structibility or  eternity  of  matter  and  of  the  con- 
servation and  transformation  of  energy.  And  this 
revelation  reconciles  all  contradictions  in  time  and 
space  by  resolving  them  into  ever  more  widely  valid 
truths  and  disposes  of  the  dualisms  which  were  the 
bane  of  philosophy. 

For  instance,  if  we  dip  a  straight,  rigid  stick  into 
a  brook,  we  see  plainly  that  the  submerged  part  is 
deflected  at  an  angle.  Again,  nobody  can  point 
to  anything  but  human  labor  as  endowing  with  an 
exchangeable  value  the  things  existing  in  nature. 
Labor,  therefore  is  the  sole  source  of  value;  yet,  the 


22  Capital  To-Day 

laborer,  under  the  capitalist  system  of  production,  is 
compensated  for  his  labor  with  only  a  part  of  the 
value  he  creates,  which  part  appears  in  the  form  of 
wages.  We  have  here  the  phenomenon  of  the  an- 
gular stick  and  the  wage  presenting  contradictions 
with  the  straight  stick  and  value.  The  former  are 
just  as  true  phenomena  as  the  latter.  But  as  all 
phenomena  are  true  only  within  the  special  relation 
of  two  things,  hence  only  within  certain  limits,  we 
must  guard  against  assigning  to  any  single  phenome- 
non a  more  general  significance  than  warranted  by 
sense  perceptions  produced  under  special  conditions, 
lest  instead  of  gaining  general  truths  we  fall  into 
dangerous  untruths.  What  is  proclaimed  as  eternal 
morality  at  one  time  becomes  the  reverse  at  another, 
or  vice  versa;  institutions  good  for  one  class  may  at 
the  same  time  be  bad  for  another  class.  Similar 
errors  would  be  committed  by  one  who,  on  the  basis 
of  limited  sense  perception,  would  pronounce  the 
crooked  stick  and  wages  general  and  permanent, 
instead  of  special  and  temporary,  phenomena.  The 
dialectic,  scientific  method  of  thought  seeks  the 
contradictions  and  reconciles  them  in  higher  truths, 
in  the  same  manner  as  it  resolves  the  contradictions 
between  the  crooked  and  straight  stick  and  between 
wages  and  value  in  the  higher  truths  of  optics  and 
economics,  respectively. 

The  progress  of  understanding  is  based  on  the 
faculty  of  thought,  proceeding  from  the  concrete  and 
multiform  to  the  general  and  harmonious  on  a  con- 
stantly higher  and  broader  plane  of  truth.  Before 
this  progress  vanish  all  dualisms  of  philosophy,  yet 


Economics  a  Science  23 

by  its  very  nature  science  never  claims  finality  for 
its  results,  as  it  was  in  the  nature  of  philosophy  to  do. 

As  the  sun  begins  to  shed  light  before  it  rises  above 
the  horizon,  so  the  coming  form  of  society,  before 
its  realization,  announces  its  advent  by  the  procla- 
mation of  its  monistic  mode  of  thought,  presaging 
the  complete  disappearance  of  all  dualisms,  along 
with  the  fundamental  dualism  of  social  classes — fun- 
damental, because  the  material  conditions  under 
which  men  live,  especially  the  economic,  have  in  all 
ages  formed  the  groundwork  of  their  ideology. 

Now,  every  student  of  Marx's  Capital  knows  that 
there  is  not  a  sentence  in  the  whole  stupendous  work 
not  based,  in  concrete  statement,  on  sense-percep- 
tions, nor  a  single  abstract  statement  which  is  not  a 
generalization  of  those  same  sense-perceptions.  This 
is  all  that  any  discipline  can  be  required  to  prove  in 
demanding  a  charter  as  a  true  science. 

But  Economics,  as  expounded  by  Marx,  is  able  to 
do  better  than  that,  in  contrast  to  some  of  the  so- 
called  natural  sciences.  In  a  wider  sense  Economics 
is  a  natural  science,  its  subject-matter  being  the 
naturally  evolved  economic  status  of  the  human 
species  in  former  ages  and  to-day.  Geology,  for 
instance,  of  unquestioned  standing  as  a  science, 
teaches  us  on  the  basis  of  sense-perception  that  there 
have  been  periods  of  subsidence  and  elevation  of  the 
land,  and  periods  of  advancing  and  retreating  glacia- 
tion,  but  it  cannot  prove  these  facts  by  experiment. 
On  the  other  hand  every  sense-perceived  economic 
phenomenon  treated  or  mentioned  in  Capital  is 
capable  of  demonstration  by  actual  experiment. 


24  Capital  To-Day 

Why,  then,  this  strange  indifference  on  the  part  of 
the  governing  bodies  of  the  universities  toward 
Marxian  Economics?  Are  they  so  Httle  interested  in 
finding  out  whether  Economics  is  still  the  sporting 
field  of  individual  opinions  and  philosophizings  as 
of  yore,  or  whether  there  has  not  arisen  in  the  mean- 
time a  science  of  Economics?  Is  there  anywhere  a 
university  that  still  maintains  alchemy  against 
chemistry  or  astrology  against  astronomy? 

A  page  in  history  tells  of  a  situation  quite  analogous 
to  the  present  one  under  discussion  and  furnishes 
an  answer  to  the  above  questions. 

During  the  whole  long  period  of  the  struggle  of  the 
aspiring  burgher  class  against  feudalism,  of  which 
the  Church  was  the  main  prop  and  beneficiary,  the 
former  had  an  interest  in  the  cultivation  of  the 
natural  sciences  for  the  reason  that  they  were  means 
for  its  own  enrichment,  while  at  the  same  time  serv- 
ing as  mental  weapons  with  which  to  overcome  the 
Church.  As  commerce  chronologically  preceded 
modern  industrialism,  so  astronomical  and  geograph- 
ical discoveries,  mainly  useful  to  the  former,  pre- 
ceded the  discoveries  in  physics,  chemistry,  geology, 
etc.,  which  were  profitable  in  the  manufactiu-es 
stimulated  by  those  previous  geographical  discoveries. 
But  the  Church,  representing  the  feudal  privileges  and 
seeing  them  menaced  by  the  revolutionary  burgher 
class  and  its  new  knowledge,  tried  to  prevent  the 
spread  of  the  sciences  by  all  means  at  its  command. 
Copernicus,  even  though  he  did  not  live  in  Rome, 
but  in  Koenigsberg,  Germany,  did  not  dare  pub- 
lish his  work  in  his  lifetime.     What  befell  Galileo 


Economics  a  Science  25 

everybody  knows;  many  "heretics"  fared  even 
worse. 

Feudalism  was  overthrown.  What  was  the  revo- 
lutionary class  is  now  the  ruling  class,  itself  confronted 
by  a  new  revolutionary  class,  the  modern  proletariat. 
What  religion  was  to  feudalism,  philosophy  is  to 
capitalism.  It  may  be  objected  that  capitalism  does 
not  take  philosophy  very  seriously.  That  may  be 
true,  as  capitalism,  revolutionary  in  its  innermost 
nature,  has  not  much  reverence  for  anything  and 
takes  nothing  very  seriously  except  profit  making. 
But  it  must  maintain  philosophy  in  its  imiversi- 
ties  as  a  theoretical  ground  on  which  they  can  re- 
fuse admittance  to  genuine  History  and  genuine 
Economics. 

Real  History,  as  well  as  the  knowledge  we  possess 
of  the  advance  of  humanity  from  savagery  to  bar- 
barism and  from  that  stage  to  civilization  (thanks  to 
the  researches  to  which  Lewis  H.  Morgan  so  fruit- 
fully devoted  his  life  and  which  have  cast  light  on  the 
origin  of  the  family,  private  property,  and  the  state) , 
can  have  no  other  logical  interpretation  than  in  the 
light  of  the  material  conditions  of  existence,  chief 
of  which  are  the  modes  of  production  and  distribu- 
tion of  the  necessaries  of  life.  It  teaches  the  rise 
of  the  ruling  classes  as  useful  new  organs  of  society, 
the  ultimate  atrophy  of  these  organs  consequent  to 
their  having  become  useless,  and  their  substitution 
by  new  ones  historically  prepared  to  assimie  the 
task  of  leading  the  race  forward  on  the  path  of 
progress. 

These  two  sciences,  then.  History  and  Economics, 


26  Capital  To-Day 

which  proclaim  in  our  day  the  early  advent  of  a  new 
social  order,  are  barred  from  the  universities  together 
with  the  foundation  of  these  sciences,  the  monistic 
Theory  of  Understanding.  Instead  they  cultivate 
under  the  protective  wing  of  speculative  philosophy 
such  studies  as  speculative  sociology,  speculative 
psychology,  speculative  logic,  speculative  economics, 
and  a  kind  of  history  of  which  the  facts  are  largely 
irrelevant  and  incoherent  and  always  unexplained. 

What  has  been  said  regarding  the  attitude  of  the 
universities  toward  History  and  Economics  should 
by  no  means  be  taken  as  a  polemic  directed  at  these 
institutions.  Either  our  colleges  are  state  insti- 
tutions, and  the  state,  while  theoretically  represent- 
ing the  whole  nation  through  universal  suffrage, 
actually  represents  only  the  interests  of  the  capitalist 
class  so  long  as  the  working  class  is  not  yet  class- 
conscious;  or  else  they  are  founded  and  endowed  by 
individual  capitalists,  and  there  the  control  is  even 
more  direct.  In  either  case  it  would  be  foolish  to 
expect  or  ask  the  universities  to  help  in  undermining 
intellectually  the  class  to  which  belong  their  financial 
backers  as  well  as  the  bulk  of  the  student  body; 
moreover  it  would  be  contrary  to  the  lessons  of  his- 
tory. Scientific  Economics  never  will  be  taught 
within  the  universities,  while  the  state  remains  a 
class  state,  though  millions  may  be  familiar  with  its 
conclusions  outside. 

The  purpose  of  these  introductory  paragraphs  has 
been  to  convince  the  reader  that  the  validity  of 
Marxian  Economics  is  not  impaired  because  the 
universities  choose    to  ignore  its  existence.     There- 


Economics  a  Science  27 

fore  that  fact  should  not  deter  from  the  frank  ap- 
proach of  the  subject  any  person  wilHng  to  think 
for  himself  and  sincere  in  the  desire  to  learn  what  is 
the  origin  of  our  present  form  of  society,  what  are 
the  laws  underlying  its  system  of  production  and  cir- 
culation, and  whether  these  laws  tend  to  give  birth 
to  a  different  form  of  society,  independent  of  the 
will  and  purposes  of  men. 

The  foundation  of  Marxism  is  the  Theory  of  Value 
of  which  we  shall  give  a  brief  outline  in  the  next 
chapter. 


CHAPTER  II 

MARXIAN   THEORY   OF  VALUE   BRIEFLY   STATED 

The  wealth  of  society,  under  the  capitalistic 
system  of  production,  appears  as  an  immense  col- 
lection of  commodities,  the  single  commodity  being 
its  elementary  form. 

To  be  a  commodity  a  thing  must  present  at  the 
same  time  two  phenomena :  that  of  being  a  use-value 
and  that  of  being  an  exchange- value. 

Use-value  is  the  generalization  or  abstraction  of 
things  as  regards  their  concrete  relations  to  human 
uses  by  reason  of  the  individual,  physical  or  chemical, 
properties  of  each  thing.  Use- value  therefore  is  the 
natural  form  of  things  and  remains  identical  in  all 
forms  of  society. 

Exchange-value  is  the  generalization  or  abstrac- 
tion of  things  as  regards  their  concrete  relations  with 
each  other  in  the  act  of  exchange  in  which  the  things 
are  represented  by  their  owners.  Exchange-value 
therefore  is  the  social  form  of  things  and  exists  only 
in  a  commodity -producing  society. 

As  use-values  commodities  are  qualitatively  differ- 
ent from  each  other  and  therefore  cannot  be  brought 
into  relation  with  each  other. 

As  values  (this  term  will  be  used  in  these  pages 

28 


Marxian  Theory  of  Value  Stated      29 

hereafter  for  exchange- value)  commodities  are  quali- 
tatively alike  and  can  be  brought  into  relation  or 
equated  with  each  other. 

The  quality  which,  as  values,  makes  all  commodi- 
ties alike,  is  the  concrete  substance  common  to  them 
all  and  generalized  as  abstract  human  labor. 

The  abstraction  "human  labor"  is  derived  from 
concrete  labors,  such  as  weaving  or  mining.  When  we 
touch  a  table  we  touch  the  union  of  the  concrete 
labors  of  the  woodman,  cabinetmaker,  etc.,  with 
nature.  Labor  is  the  father,  nature  the  mother. 
Her  gifts  are  gratis  and  do  not  enter  into  the  deter- 
mination of  value. 

The  unit  of  abstract  labor  is  common  labor. 

Common  and  complicated  labor  are  equated  with 
each  other,  both  being  qualitatively  comprised  in  the 
abstraction  "human  labor"  and  differing  only 
quantitatively,  complicated  labor  figuring  as  a  multiple 
of  the  unit. 

Commodities,  then,  being  qualitatively  connatural 
as  values,  can  be  related  and  are  related  to  each  other 
quantitatively,  viz.,  as  to  the  quantity  of  labor  em- 
bodied in  each.  This  quantity  is  measured  by  the 
time  socially  necessary  for  the  production  of  each 
commodity. 

We  now  know  that — 

The  substance  of  value  is  labor. 

The  measure  of  value  is  labor-time. 

What  remains  to  be  analyzed  is  the  form  of  value 
in  the  act  of  exchange. 

The  most  simple  expression  of  this  form  is  the  rela- 
tion between  two  commodities;  but  this  simple  rela- 


30  Capital  To-Day 

tion  must  cover  the  mystery  of  all  forms  of  value, 
the  relation  of  many  commodities  to  one,  and  the 
outcome  of  this  latter  relation:  the  money  form  of 
value.  Let  us  take  as  an  example  for  the  simple 
form  of  value : 

20  yards  linen  =  i  coat,  or  20  yards  linen  are  worth 
I  coat. 

In  Chapter  1.  the  general  scientific  principle  has 
been  mentioned  that  phenomena  consist  of  the  action 
of  one  thing  on  another.  In  this  action  one  thing 
may  be  considered  as  the  subjective  or  active,  the 
other  as  the  objective  or  passive  element.  In  our 
own  case  the  phenomenon  of  value  arises  by  the  linen 
comparing  itself  to  the  coat. 

By  expressing  its  value  relative  to  the  coat,  the 
linen  places  itself  in  the  subjective  or  Relative  Form 
of  Value. 

The  coat,  serving  as  material  for  the  expression  of 
the  value  of  the  linen,  finds  itself  in  the  objective  or 
Equivalent  Form  of  Value. 

Both  forms  are  inseparably  linked  together  in  the 
equation. 

On  the  other  hand  they  are  mutually  exclusive 
poles  of  the  equation.  The  relative  form  of  the 
value  of  the  linen  supposes  a  different  commodity 
to  be  in  the  equivalent  form.  That  different  com- 
modity, the  coat,  cannot  at  the  same  time  be  in  the 
relative  form  of  value.  It  is  not  its  own  value 
which  is  to  be  expressed. 

Of  course  the  equation  may  be  inverted:  i  coat 
=  20  yards  linen ;  in  which  case  the  coat  is  in  the  rela- 
tive, the  linen  in  the  equivalent  form.     Or  both  com- 


Marxian  Theory  of  Value  Stated     31 

modities  may  be  simultaneously  in  the  relative  and 
equivalent  forms  of  value,  but  merely  so  from  the 
point  of  view  of  each  commodity,  not  simultaneously 
in  one  expression  of  value. 

We  have  seen  that  all  commodities  are  alike  as 
connatural  and  commensurable,  and  thus  exchange- 
able values.  The  possibility  of  exchanging  commod- 
ities therefore  rests  on  our  regarding  them  only  in 
reference  to  the  one  substance  of  which  they  all 
consist,  namely,  abstract  human  labor,  and  by  dis- 
regarding them  as  to  the  various  concrete  labors  by 
which  they  are  individually  produced  and  which 
impressed  on  them  their  individual  characters  as 
use-values. 

In  proceeding  thus,  however,  we  encounter  a  con- 
tradiction which  must  be  overcome.  Abstract  human 
labor  is  a  creature  of  the  mind,  but  commodities 
are  concrete  things,  the  products  of  concrete  labors, 
such  as  weaving  and  tailoring.  Their  value  consists 
of  course  of  the  labor  spent,  but  that  value  is  not 
reflected  in  their  physical  existence,  wherein  they 
are  only  use- values.  It  is  only  revealed  by  one  com- 
modity entering  into  a  value  relation  with  another 
commodity. 

But  there  can  be  no  phenomenon  outside  of  mate- 
rial things,  and  the  material  existence  of  the  linen, 
which  is  naturally  nothing  but  a  use-value,  has  been 
disregarded  in  the  inquiry  concerning  its  value. 
This  material  existence  as  a  value,  missing  in  the 
linen,  has  been  supplied  by  the  coat  as  the  equivalent 
of  the  linen.  Thus  the  coat  becomes  the  substan- 
tiation of  the  value  of  the  linen,  the  value  form  of  the 


32  Capital  To-Day 

linen,  as  apart  from  the  material  existence  of  the 
linen . 

If  any  two  commodities  are  compared  with  each 
other  merely  in  their  quajititative  relation,  the  only 
result  is  the  determination  of  their  relative  values. 
But  if  we  realize  the  qualitative  side  of  the  comparison, 
whereby  the  natural  form  of  one  commodity  becomes 
the  value  form  of  the  other  commodity,  we  discover 
in  the  simple  expression  of  value  the  secret  of  money. 
To  clothe  this  theory  in  illustrative  form : 
The  coat  which  is  in  the  equivalent  form  of  value 
is  not  itself  the  subject  of  inquiry  as  to  its  value. 
There  lies  the  coat  in  its  natural  form  of  use-value, 
the  product  of  tailoring,  concrete  labor.  Just  as  it 
is,  it  is  to  be  used  as  the  mirror  of  the  value  of  a 
different  commodity.  Without  changing  its  physi- 
cal existence,  it  now  appears  no  longer  as  use-value 
or  the  product  of  concrete  labor,  but  as  the  product 
of  abstract  human  labor  and  the  embodiment  of  the 
generalization  "value."  Being  value  materialized, 
the  coat  is  also  the  materialization  of  the  value  of 
the  linen.  It  is  the  sense-perceived  form  of  exist- 
ence of  the  value  of  the  linen.  Thus  the  linen  gains 
a  form  of  existence  as  a  value  which  is  different  from 
its  natural  form  and  of  which  the  magnitude  is  meas- 
ured by  its  proportion  to  the  coat.  That  is,  the 
linen  has  no  other  way  of  expressing  its  own  value 
than  by  referring  to  a  definite  quantity  of  the  use- 
value  "coat"  as  representing  a  given  quantity  of 
human  labor.  The  equivalent  form  does  not  in  fact 
include  quantitative  definiteness,  except  in  so  far 
as  called  forth  by  statement  of  the  quantity  of  the 


Marxian  Theory  of  Value  Stated     33 

commodity  in  the  relative  form  of  value.  It  does  not 
include  definiteness  as  to  its  value  quantity.  The 
coat  is  entirely  passive,  not  seeking  to  ascertain  its 
own  value.  It  is  proud  to  be  a  mere  use-value  and 
as  such  directly  exchangeable  with  any  commodity 
whatever,  without  being  required  to  legitimatize 
itself.  If  the  value  of  coats  changes,  so  will  the 
relation  to  it  of  linen,  but  the  latter  cannot  form  this 
new  relation,  unless  the  value  of  coats  is  a  given 
quantity. 

When  a  commodity  is  recognized  in  relation  to 
other  commodities  as  a  universal  equivalent,  it  is 
directly  exchangeable  with  them,  which  means  that 
it  is  so  exchangeable  without  being  required  to  first 
express  its  own  value  in  something  else.  In  this  way 
the  natural  form  of  the  commodity  so  recognized, 
namely  that  of  a  use-value,  is  transformed  into  its 
exact  opposite;  it  becomes  the  materialization  of 
exchange- value.  It  is  now  nothing  but  exchange- 
value.  But  this  holds  good  for  such  commodity 
only  within  the  value  relation,  in  which  it  functions 
as  the  general  equivalent;  outside  of  the  same  it 
remains  a  simple  commodity  with  all  the  attributes 
of  such. 

As  such  commodity,  whether  it  be  a  coat  or  gold, 
develops  into  the  form  of  being  the  substantiation 
of  value,  so  does  of  course  the  concrete  labor  by  which 
it  is  produced  assume  the  form  of  substantiation  of 
abstract  labor.  And  on  account  of  the  social  func- 
tion of  the  commodity  which  is  in  the  equivalent 
form  of  value,  the  production  of  such  a  commodity, 
which  is  directly  exchangeable,  assumes  the  char- 


34  Capital  To-Day 

acter  of  directly  social  production,  although  con- 
ducted by  private  persons  for  their  own  profit, 
whereas  the  production  of  commodities  in  the  rela- 
tive form  of  value  is  only  indirectly  social,  these  being 
only  indirectly  exchangeable. 

This  r61e  of  a  commodity  in  the  equivalent  form 
of  value  may  be  illustrated  by  an  analogous  role  of 
a  commodity  in  the  equivalent  form  of  weight.  To 
ascertain  the  definite  weight  of  a  loaf  of  sugar  we 
equate  it  with  stamped  iron  weights.  Iron  is  no 
more  the  concrete  form  of  gravity  than  sugar,  but 
the  former  has  come  to  be  adopted  as  the  embodi- 
ment of  weight,  all  its  other  physical  qualities  being 
disregarded  and  its  weight  relation  to  other  things 
being  considered  exclusively.  As  the  iron  is  to  the 
sugar  nothing  but  weight,  so  the  coat  is  to  the  linen 
nothing  but  value. 

In  the  statement :  20  yards  linen  =  i  coat  there  is 
expressed,  as  regards  the  linen,  that  it  is  first  a  use- 
value  (linen),  secondly  an  exchange-value  (some- 
thing akin  to  the  coat),  thirdly  a  union  of  both — 
consequently  that  it  is  a  commodity  as  defined  at 
the  beginning  of  this  chapter. 

A  product  of  useful  labor  is  naturally  a  use- 
value. 

To  become  a  commodity  it  needs  the  additional 
character  of  value,  which  it  cannot  possess  in  an 
isolated  state.  The  material  existence  of  its  value 
is  supplied  by  another  commodity. 

The  development  of  the  commodity  form  includes 
that  of  the  value  form.  The  development  of  the 
equivalent  form  of  value  is  the  expression  and  result 


Marxian  Theory  of  Value  Stated     35 

of  the  development  of  the  relative  form  of  value,  as 
we  shall  presently  see. 

The  simple  value  relation  between  two  commodi- 
ties has  been  analyzed  as  the  contradiction  between 
use-value  and  non-use- value  (exchange  value)  inher- 
ent in  the  commodity  and  as  the  polarity  of  two 
different  kinds  of  commodities. 

This  simple  form  of  value  corresponds  to  that  stage 
in  history  in  which  exchanges  were  only  occasional, 
but  it  contains  the  germ  which  through  a  series  of 
metamorphoses  led  to  the  price  form. 

The  inadequacy  of  the  simple  form  of  value  as  an 
expression  of  value  in  general  is  apparent,  just  as 
would  be  any  limited  phenomenon  for  the  enuncia- 
tion of  a  general  truth.  The  proportion  in  which 
two  commodities  exchange  with  each  other  might 
be  accidental. 

With  the  production  of  a  particular  thing  in  excess 
of  the  needs  of  the  community,  as  for  instance  of 
sheep  in  the  case  of  nomads,  the  surplus  seeks  ex- 
change with  foreign  products.  Hence  arises  the 
necessity  of  comparing  the  relative  value  of  one 
product  with  a  multiplicity  of  equivalents.  These 
appear  as  so  many  simple  expressions  of  value;  in 
point  of  fact  it  is  the  sum  of  the  single  expressions  of 
value  which  constitutes  the  expanded  form  of  relative 
value,  viz.: 


20  yards  linen  = 


I  coat 
I  ton  iron 
10  bushels  wheat 
I  oz.  gold 


36  Capital  To-Day 

Now,  indeed,  the  value  of  the  linen  appears  as  the 
substantiation  of  abstract,  undifferentiated  human 
labor,  the  equal  of  every  kind  of  concrete  work.  It 
is  seen  at  the  same  time  that  the  production  of  X 
ounce  of  gold  requires  as  much  labor  as  five  bushels 
of  wheat. 

But  this  form  of  value  is  still  imperfect,  first, 
because  every  commodity  differs  from  every  other 
in  the  expression  of  its  relative  value;  secondly, 
because  the  expression  of  relative  value  is  endless 
owing  to  the  constant  appearance  of  new  products; 
thirdly,  because  of  the  Hmitation  as  a  value  expres- 
sion of  each  product  in  the  equivalent  form  of  value, 
which  products  in  this  position  mutually  exclude 
each  other — hence  a  complete  lack  of  unity  in  the 
expression  of  value;  fourthly,  because  the  Hst  of 
equivalents  never  ends. 

When  the  production  of  some  specialty  for  the 
express  purpose  of  exchange  has  reached  a  certain 
volume,  the  owners  of  the  variety  of  commodities 
acquire  the  habit  of  expressing  their  value  in  terms 
of  the  overshadowing  specialty,  thus: 


I  coat 
I  ton  iron 
10  bushels  wheat 
^  oz.  gold 


=  20  yards  linen 


They  have  arrived  at  a  general  form  of  value  in  its 
simple  expression,  i.  e.,  in  one  exclusive  commod- 
ity, and  in  its  uniform  expression,  which  enables 
all  commodities  to  compare  their  values  with  each 
other.     In  other  words  they  have  arrived  at  a  general 


Marxian  Theory  of  Value  Stated     37 

social  form  of  value.  The  polarity  of  the  simple  form 
of  value,  which  had  been  merely  formal,  has  now 
acquired  objective  consistency  and  social  validity. 

During  the  historical  processes  many  commodities 
have  served  as  general  equivalents  within  a  greater 
or  narrower  circle,  but  finally  gold,  from  having 
been  a  simple  commodity,  then  a  money  commod- 
ity, alongside  of  others,  conquered  the  position  of 
monopoly  as  the  world's  one  general  equivalent, 
— the  thing  that  can  directly  buy  anything  any- 
where. The  evolution  has  carried  us  to  the  money 
form  of  value,  like  this : 


20  yards  linen 

I  ton  iron 
10  bushels  wheat 

I  coat 


=  ^  oz.  gold  or  $10 


While  the  weaver  may  have  expressed  in  terms  of 
linen  the  value  of  all  commodities,  including  that  of 
the  coat,  the  money  form  of  value  changes  his  indi- 
vidual and  subjective  mode  of  expression  of  value 
to  a  socially  objective  mode  in  the  price  form.  Pre- 
vious to  such  social  expression  of  the  value  of  pro- 
ducts, as  the  embodiment  of  undifferentiated  human 
labor  in  a  single  material,  no  perfect  form  of  commod- 
ity could  exist  and  therefore  no  world  market.  The 
value  of  a  commodity  expresses  the  relation  of  the 
necessary,  normal  labor  time  which  must  be  spent 
in  its  production  to  the  social  labor  time.  The 
accident  of  a  crop  above  or  below  the  average  affects 
temporarily  the  price  of  the  particular  product,  but 
not  its  value  in  so  far  as  there  is  no  permanent  change 


38  Capital  To-Day 

in  the  time  necessary  for  the  production  of  a  given 
quantity  of  that  product.  It  follows  that  if  the 
average  price  of  any  product  for  a  number  of  years 
be  taken,  this  average  is  likely  to  be  fairly  indicative 
of  the  value. 

Furthermore,  in  the  capitalist  system  of  society 
the  economic  equality  of  the  workers  of  the  pre- 
capitalist era  is  supplanted  by  the  economic  equality 
of  the  capitalists  which  decrees  the  principle:  "equal 
profit  for  equal  capital,"  and  enforces  this  in  industry, 
commerce,  and  finance,  as  long  as  free  competition 
survives  in  any  of  these  spheres.  This  means  that 
capital,  instead  of  labor,  has  become  the  decisive 
factor.  No  longer  the  quantity  of  labor  incorporated 
in  a  commodity,  but  the  cost  of  production  deter- 
mines the  price.  Hence  the  tendency  of  competing 
capitalists  to  reduce  the  cost  of  production  by  increas- 
ing the  labor  of  the  workers. 

In  such  industries  in  which  the  competitive  stage 
of  capitahsm  is  already  passed,  the  price  of  a  com- 
modity is  also  not  determined  by  the  quantity  of 
labor  incorporated  in  such  commodity,  as  in  pre- 
capitahst  days;  nor  is  it  determined  by  the  cost  of 
production,  as  in  competitive  capitalism.  The  price 
now  becomes  purely  arbitrary  within  the  limitation 
of  "what  the  traffic  will  bear,"  to  use  an  expression 
which  has  become  famous. 

Finally  price  in  certain  cases  loses  all  connection  with 

value  and  becomes  purely  imaginary,  as  in  the  case 

of  land,  which,  not  being  a  product  of  labor,  has  no 

value,  or  when  we  speak  of  the  price  of  a  man's  honor. 

The  economic  fact  that  the  two  phases  of  capitalist 


Marxian  Theory  of  Value  Stated      39 

society  have  evolved  their  own  methods  of  deter- 
mining price,  both  in  disregard  of  value,  is  a  nega- 
tion, but  not  an  annulment  of  the  theory  of  value, 
precisely  as  the  optic  fact  of  the  bent  stick  in  the 
brook,  to  recur  to  an  illustration  used  in  the  previous 
chapter,  fails  to  disprove  the  rigidity  of  the  stick. 
The  determination  of  price  under  capitalism  on  prin- 
ciples other  than  value  merely  indicates  that  the 
exchange  of  equivalents  is  not  the  essential  charac- 
teristic of  the  commodity -producing  society.  Only 
during  its  pre-capitalist  phase,  owing  to  the  social 
equality  of  the  members  of  society,  all  working  under 
equal  conditions  of  production  as  owners  of  their 
simple  tools,  price  was  equal  to  value.  Hence  this 
phase  is  the  starting-point  for  an  inquiry  into  the 
modifications  of  the  conditions  which  have  resulted 
in  the  divergence  of  price  from  value.  With  the 
transformation  of  the  independent  workers  into  the 
modern  proletariat,  their  labor  power,  bought  by 
the  capitalist's  money,  became  capital  while  in  the 
possession  of  the  latter,  the  same  as  any  other  com- 
modity he  had  bought.  Therefore  the  product  was 
no  longer  the  fruit  of  labor,  but  of  capital.  It  be- 
longed to  capital  and  its  price  was  determined  by  the 
conditions  of  capital. 

The  former  social  equality  had  given  way  to  social 
inequality.  But  exchange  is  a  relation  of  equality. 
This  necessary  equality  appeared  now  as  that  of  the 
capitalists,  who,  in  free  competition  for  the  spheres 
of  investment,  worked  out  a  general  profit  rate  for 
all  capital.  At  the  same  time  uneven  technical 
progress  in  different  industries  and  uneven  intensity 


40  Capital  To-Day 

of  labor,  even  as  between  individual  capitalists  in 
the  same  industry,  resulted  in  uneven  productivity 
of  labor,  therefore  in  uneven  cost  of  production. 

Commodity  production,  in  spite  of  private  prop- 
erty and  individual  initiative,  is  essentially  social 
production.  Commodities  are  produced  for  the 
social  alimentation  under  a  system  of  social  division 
of  labor.  Exchange  of  the  products  is  the  social 
fact  without  which  there  would  be  no  economic  soci- 
ety, no  value,  and  no  theory  of  economics.  The 
responsibility  of  the  individual  producer  consists  in 
the  relation  of  his  product  to  the  social  need.  Only 
socially  necessary  labor  counts,  both  in  relation  to 
the  state  of  social  efficiency  in  production  and  to  the 
total  quantity  of  a  given  product  socially  required. 

In  capitalist  society  social  efficiency  is  gauged  by 
reduced  cost  of  production.  The  average  cost  of 
production,  regardless  of  quantity  of  labor,  deter- 
mines price  and  average  profit  rate.  The  equation 
is  no  longer:  for  value  equal  value,  but:  for  equal 
capital,  equal  profit. 

It  follows  from  the  foregoing  considerations  that 
in  all  forms  of  the  commodity -producing  societ}^  the 
essential  basis  of  exchange  is  not  the  equivalent  of 
commodities,  but  socially  necessary  labor. 

After  society  has  duly  and  to  the  best  of  its  ability 
compared  the  individual  product  in  its  relation  to  the 
social  requirement,  it  either  confirms  to  the  producer 
that  the  labor  embodied  in  his  product  was  "socially 
necessary,"  in  the  double  sense  here  given  to  this 
expression,  by  allowing  him  for  it  in  full  the  socially 
recognized  equivalent,  money;  or,  if  the  (otherwise 


Marxian  Theory  of  Value  Stated     41 

useful)  commodity  has  been  produced  in  excess  of 
the  social  requirement  or  under  subnormal  conditions 
of  efficiency,  society  reduces  the  sum  allowable  for 
it  to  the  average  of  socially  necessary  labor. 

But  society  is  doing  neither  the  one  thing  nor  the 
other  consciously  by  fixing  the  quantity  to  be  pro- 
duced of  each  variety  of  useful  things,  or  the  labor 
time  to  be  devoted  to  the  production  of  each.  Pro- 
duction being  induced  primarily  by  the  needs  of  the 
individual,  although  ultimately  social  in  character, 
the  social  will  enters  only  into  play  subsequently 
to  the  fact  of  production  and  makes  its  laws  felt 
only  indirectly  in  the  process  of  exchange  of  commodi- 
ties. The  exchange  itself  is  only  a  relation  of  things, 
not  of  collectively  conscious  persons.  The  indi- 
viduals representing  the  things  become  cognizant  of 
the  social  will  only  by  the  effected  exchange  which 
enables  them  to  proceed  with  reproduction.  The 
social  coherence  of  the  commodit}^ -producing  society 
being  only  a  relation  of  things,  it  can  do  no  more 
than  clothe  one  special  thing  with  absolute  social 
power  to  express  the  social  recognition  of  each  sepa- 
rate commodity  as  socially  necessary  labor.  This 
special  thing  is  money.  It  goes  without  saying  that 
money  was  likewise  no  conscious  social  creation,  but 
a  form  developed  by  one  particular  commodity  in  the 
course  of  the  development  of  commodity  production 
in  general.  That  money  must  be  a  thing  of  value, 
representing  general  labor  time,  is  founded  on  the  in- 
nermost nature  of  the  commodity -producing  society. 

Money  is  the  absolutely  social  form  of  wealth.  It 
can  readily  buy  every  other  form  of  wealth.     Therein 


42  Capital  To-Day 

lies  its  power.  Its  erstwhile  social  function  has  been 
converted  by  the  logic  of  history  into  private  power. 
From  having  been  a  handmaiden  of  the  commodity, 
money  has  become  its  master.  No  profit,  no  pro- 
duction !  All  this  has  come  about  because  what  is  at 
bottom  a  social  relation  of  men  has  taken  the  form 
of  a  relation  of  things.  They  control.  Man  merely 
represents  them,  his  ownership  is  only  a  juridical 
relation,  a  mere  reflection  of  the  economic  relation 
of  things.  He  is  controlled.  Gold  is  the  exclusive 
thing  of  things,  because  it  is  the  incarnation  of  all 
labor.  It  appears  as  a  fetich  created  by  man's 
hands,  ruling  him  in  his  material  affairs,  as  the  cre- 
ations of  his  mind  rule  him  in  religion.  A  period  of 
unemplo3'ment  sets  in  for  the  workers.  The  Fetich 
wills  it!  Vocational  disease  attacks  the  breadwin- 
ner. The  Fetich  wills  it!  The  storm  clouds  of 
panic  gather  over  the  heads  of  the  capitalists.  Like 
a  desperate  wolf  the  creditor  flies  at  the  throat  of  the 
debtor.  What! — commodities?  What! — personal 
honesty?  They  are  all  sham.  There  is  nothing  real 
but  gold ;  there  is  no  protection  but  the  Fetich !  But 
the  real  fetich  is  not  the  yellow,  glittering  gold  which 
dazzles  the  eyes :  behind  it,  more  concealed  from  view, 
is  the  arch-fetich,  its  parent — the  commodity. 

Man's  emancipation  from  his  fetich,  which  will 
be  accomphshed  by  his  passing  out  of  the  commodity- 
producing  form  of  society,  means  that  he  has  ceased 
to  be  the  unconscious  object  of  evolution  and  that 
he  has  arrived  at  the  point  when  he  will  be  the  master 
of  his  destiny.  With  that  he  passes  definitely  out  of 
the  animal  kingdom :  the  free  man, 


CHAPTER  III 

THE    CONTRADICTORY   FUNCTIONS   OF   MONEY 

a.  Circulating  medium. 

Most  of  the  more  desirable  or  valuable  commod- 
ities seem  at  one  time  or  other,  and  in  one  part  of 
the  world  or  other,  to  have  officiated  as  general 
or  at  least  widely  accepted  equivalents  and  even, 
in  certain  cases  in  comparatively  recent  times,  as 
lawful  money.  Thus  in  our  own  country  tobacco 
was  legal  tender  in  Virginia  during  the  first  half  of  the 
seventeenth  century,  while  wampum  shells  officiated 
as  general  equivalent  between  the  Indians  and 
whites  of  the  Northeast,  and  were  even  for  a  short 
time  legal  tender  for  a  limited  amount  in  Connecti- 
cut. These  shells  were  a  use-value  to  the  Indians 
for  ornamentation  and  to  the  whites  by  their  conver- 
tibility into  furs,  having  in  the  latter  respect  a  certain 
resemblance  to  our  present-day  circulating  medium 
made  of  intrinsically  worthless  paper.  With  the 
decline  of  fur  catching  and  the  counterfeiting  of  the 
black  shells  (one  worth  two  white  ones)  by  the  white 
men,  wampum  lost  its  use-value  for  both  sides  and 
therefore  its  exchange-value.  Even  very  recently 
among  the  Indians  of  British  Columbia  "Haiqua- 

43 


44  Capital  To-Day 

shells  worn  as  ornamental  borders  to  their  dresses 
serve  them  also  as  currency  to  trade  with, — a  string 
of  ordinary  quality  being  reckoned  as  worth  one 
beaver's  skin.  "^ 

In  general  the  tendency  has  been  toward  the  in- 
creased use  of  the  metals  as  money,  and,  with  increas- 
ing wealth,  toward  the  displacement  of  the  cheaper 
and  less  suitable  metals  like  iron,  lead,  tin,  and  cop- 
per by  the  more  precious  and  eminently  suitable 
metals  silver  and  gold. 

In  the  long  process  of  selection  of  one  material  to 
the  position  of  world-money,  gold  won  by  its  natural 
qualities,  as  soon  as  it  existed  in  sufficient  quantity. 
This  metal,  besides  being  of  beautiful  and  unchang- 
ing color  and  luster,  the  only  yellow  one,  and  having 
the  power  of  resisting  oxidation,  has  remarkable 
properties  of  malleability  and  ductibility.  One 
grain  of  gold  has  been  beaten  out  to  the  extent  of 
75  square  inches,  so  that  367,650  leaves  were  only  one 
inch  in  thickness  or  the  1200th  part  of  ordinary 
printing  paper,  although  in  practice  only  about  two 
thirds  of  this  tenuity  is  made  use  of.  Gold  is  so 
extremely  ductile  that  one  grain  may  be  drawn  into 
a  wire  500  feet  long,  and  one  ounce  made  to  cover  a 
silver  wire  1300  miles  long.  It  established  itself  as 
a  universally  coveted  use-value  in  being  the  raw 
material  for  articles  of  adornment  of  places  of  wor- 
ship, palaces,  and  tombs,  and  for  personal  ornaments. 
The  quality,  however,  which  pre-eminently  adapts 
gold  for  the  r61e  of  world-money  is  its  homogeneity, 
which  makes  it  easy  of  standardization,  divisible  into 

'  E.  B.  Taylor,  Anthropology. 


Functions  of  Money  45 

minor  quantities  which  are  again  fusible  into  larger 
bulk. 

Gold  is  now  the  sole  international  money  as  well 
as  the  basis  of  value  of  all  national  systems  of  cur- 
rency, except  in  China,  which  has  no  national  mone- 
tary system,  silver  being,  however,  the  only  money 
or  general  equivalent  in  use  (aside  from  copper). 

Economists  ascribe  the  origin  of  money  to  the 
difficulties  of  barter,  considering  money  a  cunning 
device  to  overcome  them.  Commodities  as  use- 
values  cannot  be  subdivided  at  will — a  property 
which  they  should  possess  as  exchange- values. 
Economists  do  not  notice,  or  they  fail  to  elucidate, 
the  contradiction  between  the  two  characters  inherent 
in  the  same  thing.  Sufficient  for  them  that  money 
has  overcome  the  particular  difficulty  referred  to,  as 
well  as  others  of  similar  nature, — for  instance  that  a 
commodity  offered  by  A  in  exchange  for  another 
belonging  to  B  may  not  have  use-value  for  the  latter. 
Money,  for  which  gold  was  the  natural  material  by 
reason  of  its  homogeneity,  divisibility,  indestructi- 
bility, gravity,  and  other  exceptional  properties,  is 
the  result  of  the  evolution  of  a  pre-existing  rudi- 
mentary form,  similar  to  the  evolution  of  other 
institutions,  or  of  the  categories  of  biology,  and 
the  necessity  for  it  developed  with  the  production 
of  commodities  instead  of  mere  use-values.  Con- 
crete work  became  abstract  social  labor,  homogeneous 
and  divisible  into  units  of  universal  labor-time.  But 
as  the  production  of  commodities  is  not  directly 
social  labor,  or  the  labor  of  associated  individuals, 
and  is  only  indirectly  social  through  the  universal 


46  Capital  To-Day 

alienation  of  the  products  of  private  and  uncontrolled 
producers,  the  social  validity  of  their  labor  could  be 
confirmed  to  them  in  no  other  way  than  by  giving 
them  an  equivalent  representing  social  labor-time 
,and  therefore  exchangeable  for  any  existing  com- 
modity in  any  quantity  desired.  Without  such 
social  equivalent  there  would  be  no  exchange 
value,  without  exchange  value  no  commodities, 
without  commodities  no  capitalistic  mode  of  produc- 
tion. As  long  as  this  mode  of  production  exists, 
"the  antagonism  of  commodity  and  money  is  the 
abstract  and  general  form  of  all  antagonisms  with 
which  the  capitalistic  form  of  labor  is  pregnant,"^ 
because  commodity  stands  for  private  production, 
and  money  for  the  social  form  of  labor-time. 

Gold  is  the  crystallized  form  of  the  exchange  value 
of  concrete  commodities  of  which  the  abstraction  is 
expressed  by  the  word  "wealth."  Every  com- 
modity satisfies  only  one  particular  want,  but  gold 
satisfies  every  want.  Therefore  gold  is  the  material 
form  of  the  abstraction  "wealth."  But  the  quanti- 
tative limitation  of  the  material  is  in  contradiction 
with  its  qualitative  universality, — a  stupendous  fact 
which  will  receive  due  attention  in  the  course  of  this 
volume.  None  the  less  does  it  appear  that  "the 
universal  product  of  the  social  process,  or  the  social 
process  itself  as  a  product,  is  a  peculiar  natural  pro- 
duct, a  metal  hidden  in  the  bowels  of  the  earth  and 
extracted  therefrom."^ 

'  A  Contrihidion  to  the  Critique  of  Political  Economy,  by  Karl  Marx. 
Translation  by  N.  I.  Stone,  p.  122. 
» Ibid.,  p.  212. 


Functions  of  Money  47 

The  fact  that  the  money  form  of  value  is  derived 
from  the  commodity  form  is  evidenced  by  the  fact 
that  the  unit  value  of  the  precious  metals,  previous 
to  their  coinage,  was  weight,  generally  the  pound 
silver.  Instance  the  pound  sterling,  now  a  mere 
name  having  no  relation  to  the  substance,  or  the  old 
French  livre,  debased  by  the  progressive  counter- 
feiting by  the  kings  during  centuries  up  to  the 
Revolution  to  one  seventy-eighth  of  its  original 
value,  so  that  81  livres  were  taken  as  the  basis  for 
80  francs,  the  new  coin  of  the  Revolution.  Even 
to-day  (or  at  least  until  a  few  years  ago)  bulk  silver 
circulates  as  a  money  commodity  in  China — the 
sycee,  which  for  easier  circulation  is  assayed  by 
some  well-known  merchant  who  impresses  his  stamp 
on  it.  This  is  recognized  within  a  narrower  or  wider 
circumscription  until  the  sycee  finds  its  way  into  re- 
gions where  this  merchant  is  not  known,  when  another 
reputable  merchant  repeats  the  assay  and  stamping. 

To  the  state,  as  the  highest  manifestation  of 
social  consciousness  so  far  attained,  has  been  assigned 
the  function  of  determining  the  technical  details 
of  the  issue  of  money  and  its  legal  status  between 
the  citizens  of  the  state.  It  has  not  arbitrarily 
selected  either  the  material  which  was  to  constitute 
money,  nor  has  it  endowed  it  with  various  functions 
and  characters,  as  for  instance  the  potential  char- 
acter of  capital.  The  material  of  money,  as  well  as 
its  functions  and  character,  are  the  results  of  econo- 
mic evolution  subsequently  recognized  by  the  state 
and  fixed  in  law,  as  all  accomplished  facts  in  social 
evolution  have  always  been. 


48  Capital  To-Day 

In  coinage  the  state  departed  from  the  weight 
unit,  issuing  pieces  of  a  convenient  weight  and  fine- 
ness. In  these  respects  as  well  as  in  the  national 
dress  in  which  they  all  appear,  they  differ  from 
each  other  in  the  various  countries,  but  they  all 
perpetuate,  so  far  as  gold  is  concerned,  the  principle 
of  weight  and  fineness,  viz.  of  exchange-value,  in 
their  conventional  units. 

Gold  being  ill  adapted  for  denominations  below 
a  certain  bulk,  the  necessary  circulation  of  such 
smaller  denominations  is  effected  by  subsidiary  coin 
of  less  than  face  value  in  gold  and  made  of  silver, 
copper,  or  a  nickel  alloy.  Such  we  find  in  the  United 
States  in  the  silver  "Standard  Dollars"  or  the  stor- 
age certificates  of  such  dollars,  called  silver  certifi- 
cates. They  are  of  much  less  than  their  face  value 
in  gold,  with  which  they  have  nevertheless  so  far 
remained  on  a  footing  of  equality  as  a  circulating 
medium  within  the  boundaries  of  the  country.  All 
coins,  whose  intrinsic  or  bullion  value  is  less  than  their 
face  value,  are  not  money  in  the  historical  and  theo- 
retical sense  of  the  word,  but  only  tokens  of  money 
(gold).  Failing  to  maintain  themselves  as  such, 
they  become  tokens  of  value  in  general  down  to  the 
minimum  given  by  their  own  values  as  commodities. 
As  tokens  they  will  be  considered  more  in  detail  in 
future  chapters. 

Fractional  currency  is  generally  a  token  of  nominal 
value  and  in  the  United  States  consisted  for  a  num- 
ber of  years  after  the  Civil  War  almost  entirely  of 
paper  slips  which  answered  the  purposes  of  retail 
trade  and  were  only  inconvenient  from  becoming 


Functions  of  Money  49 

crumpled  and  dirty  and  being  easily  lost.  Fractional 
currency  is  coined  only  to  the  extent  of  its  require- 
ment in  retail  trade  and  is  legal  tender  only  for  a  very 
limited  amount. 

For  the  settlement  of  international  trade  balances 
or  for  international  loans  there  is  recognized  no 
money  but  gold  (bars  or  coins)  by  weight 

h.  Measure  of  value. 

Gold,  being  the  universal  equivalent,  has  no  ex- 
pressed value,  unless  it  were  to  be  stated  in  terms  of 
all  kinds  of  commodities  by  placing  them  all  in  the 
equivalent  and  gold  alone  in  the  relative  form  of 
value.  The  measure  of  the  value  of  gold  itself,  like 
that  of  every  other  commodity,  is  the  labor  time 
necessary  for  its  production.  The  equation  of  its 
value  with  commodities  is  made  by  barter  at  the 
mines,  but  part  of  the  gold  not  so  disposed  of  may 
be  sent  to  the  nearest  mint  for  coinage,  whereupon 
its  value  is  given. 

Commodities  appear  on  the  market  in  a  double 
form:  in  their  concrete  form  they  are  useful  things, 
in  their  abstract  form  they  are  values.  This  ab- 
straction is  by  social  agreement  represented  in  con- 
crete form  by  gold.  The  value  of  the  commodities 
exists  therefore  merely  abstractly  in  the  imagination 
of  their  owners  as  an  equally  imagined  quantity  of 
gold  until  by  the  act  of  sale  the  abstract  value  of  the 
commodity  is  realized  by  and  assumes  the  concrete 
value  form  of  money.  It  is  in  this  abstract  form 
that  money,  or  a  quantity  of  gold,  serves  as  the 
money  name  or  price  of  a  commodity. 
4 


50  Capital  To-Day 

Commodities  and  money,  then,  confront  and  com- 
plement each  other  in  the  process  of  exchange  as 
follows : 

Commodities 

concrete — objects  generalized  as  use-value 
abstract — objects  of  ideal  exchange-value 

Money 

concrete — embodiment  of  exchange-value 

abstract — expression  of  prices,  namely,  ideal  use-value 

A  change  in  the  value  of  money  can  arise  only 
from  a  change  in  the  labor  time  required  in  mining 
a  given  quantity  of  gold.  Such  a  change  does  not 
interfere  with  the  usefulness  of  gold  as  a  measure  of 
value,  since  all  commodities  are  affected  alike.  While 
commodity  prices  advance  or  decline,  according  to 
the  increase  or  decrease  of  their  own  value,  they  may 
also  do  so  inversely  to  the  change  of  value  of  money. 
This  statement  by  no  means  precludes  the  possibil- 
ity of  a  number  of  commodities  remaining  at  station- 
ary prices,  if  their  value  changes  are  in  the  same 
direction  as  those  of  gold  and  are  proceeding  in  the 
same  tempo. 

The  usefulness  of  gold  as  the  measure  of  value,  in 
spite  of  the  variations  in  its  own  value,  is  due  to  the 
fact  that  its  supply  has  never  been  equal  to  the 
demand  and  that  therefore  this  commodity  could  at 
all  times  and  everywhere  be  relied  on  as  being  ac- 
ceptable in  exchange  for  any  other  commodity. 


Functions  of  Money  51 

But  scarcity,  a  necessary  condition  in  any  com- 
modity for  the  money  function  of  measure  of  value, 
is  a  contradiction  to  the  requirement  of  abundance 
of  money  as  means  for  the  circulation  of  the  stock 
of  commodities.  Yet  the  two  functions  are  insep- 
arably united  in  the  same  money  commodity. 

This  contradiction  did  not  give  rise  to  any  serious 
economic  problem  so  long  as  the  production  of 
commodities  had  only  partly  displaced  production 
by  the  community  or  family  for  their  own  use, 
and  tributes,  rents,  services,  etc.,  were  mainly  paid 
in  products;  so  long,  then,  as  the  production  of 
commodities  had  not  become  the  prevailing  mode  of 
production.  It  was  possible  for  the  money  in  circu- 
lation to  be  relatively  scarce,  notwithstanding  the 
fact  that  every  purchase  or  sale  called  for  the  dupli- 
cation of  value,  because  a  given  quantity  of  the  money 
commodity  sufficed  to  effect  the  necessary  exchanges 
of  commodities  of  a  much  greater  aggregate  value 
than  itself  by  passing  successively  and  more  or  less 
rapidly  from  hand  to  hand. 

But  when  the  commodity-producing  society  had 
graduated  into  its  capitaHstic  form,  the  production  of 
commodities  became  more  and  more  the  prevaihng, 
and  ultimately  practically  the  universal,  mode  of 
production.  Payment  in  money  superseded  gener- 
ally payment  in  products.  ^^lachine  production  on  a 
large  scale  for  the  greatly  increased  populations  far 
outran  in  value  the  scale  of  production  of  gold, 
which  has  its  natural  hmitations.  To  all  these 
developments  was  added  the  separation  in  time  of 
purchase    and    payment,     creating    an    additional 


52  Capital  To-Day 

function  of  money  as  means  of  deferred  payment,  the 
subject  of  the  next  division  of  this  chapter.  This 
latter  function  includes  the  entire  capitalist  credit 
system  in  which  the  quantity  of  money  needed  at 
any  particular  time  becomes  utterly  incalculable, 
but  in  its  vastness  is  out  of  all  proportion  to  the 
supply  of  gold. 

Fully  developed  capitalist  society  must  have  gold, 
or  some  other  single  commodity  at  least  equally 
well  adapted,  as  a  universal  equivalent.  The  legal 
coexistence  of  more  than  one  commodity  as  general 
equivalent,  as  for  instance  of  silver  alongside  of  gold, 
would  be  possible  only  if  the  one  were  a  by-product 
of  the  other  in  an  unvarying  proportion,  and  neither 
occurred  independently  in  nature.  On  such  a 
supposition  the  value  changes  of  such  different 
products  would  always  run  parallel,  although  the 
value  of  each  differed  from  the  other.  But  no  such 
combination  exists.  As  to  the  value  relation  of  gold 
and  silver,  it  remains  stationary  scarcely  for  two 
successive  days,  and  all  attempts  in  the  past  to  fix  it 
by  law  have  proven  futile. 

Without  a  socially  recognized  equivalent  for  every 
other  commodity,  the  commodity-producing  society 
cannot  live  a  day.  The  selection  of  thousands  of 
years  has  fallen  on  gold  as  the  standard  commodity, 
and  this  form  of  society  stands  or  falls  on  this  foun- 
dation. It  has  required  the  maturing  of  capital 
within  the  last  fifty  years  to  reveal  the  inherent 
contradictions  of  money  and  the  impossibility  of 
permanent  commodity  production.  The  contra- 
dictions between  the  different  functions  to  be  per- 


Functions  of  Money  53 

formed  by  the  identical  money  material,  and  nothing 
else  as  much  as  these  contradictions,  are  the  funda- 
mental and  fatal  defect  of  commodity  production. 

So  far  these  contradictions  have  been  met  by  the 
device  of  various  forms  of  imaginary  money,  dis- 
cussion of  which  is  reserved  for  later  chapters.  We 
shall  see  that  these  forms  of  money  cannot  reconcile 
the  contradictions,  but  can  be  helpful  only  in  afford- 
ing a  delay  of  the  inevitable  cataclysm,  which  must 
be  the  final  outcome  of  these  contradictions,  mean- 
while enabling  capitalism  to  progress  further  in  its 
historic  mission,  the  organization  of  the  productive 
forces. 

c.  Means  of  deferred  payment. 

During  the  pre-capitalist  period  of  commodity 
production  the  worker,  himself  the  owner  of  the 
limited  means  of  production  required  in  his  trade, 
produced  his  specialty  for  a  local  market  which 
also  afforded  the  means  of  satisfying  his  own  wants 
by  an  exchange  of  equivalents  through  the  medium 
of  money.  Every  sale  or  purchase  entailed  an 
actual  exchange  of  places  between  commodity  and 
money,  therefore  the  duplication  of  value. 

The  condition  of  immediate  exchange  of  values 
underwent  a  change  in  the  course  of  the  development 
of  the  capitalist  system  of  large-scale  production  for 
a  wider  market,  with  the  accumulation  of  profit 
as  the  object.  This  system  called  for  continuity  of 
the  process  of  production  so  as  to  avoid  the  dis- 
integration of  the  labor  force  employed  in  a  factory, 


54  Capital  To-Day 

as  well  as  the  relatively  high  general  expenses  which 
result  from  interruptions  of  production.  On  the 
other  hand  the  demand  for  many  kinds  of  goods  is 
seasonal.  For  these  and  other  reasons,  unnecessary 
to  recount,  the  seller  would  appear  on  the  market 
before  the  buyer  was  ready,  and  hence  arose  the 
necessity  for  the  former  to  accept  in  realization  of  his 
commodities,  not  money,  but  a  civil  obligation,  on 
the  part  of  the  buyer,  of  future  money.  Again,  the 
necessity  of  selling  for  future  money  entails  the 
necessity  of  procuring  the  present  money  needed 
for  reproduction  by  borrowing.  Discounting  the 
buyer's  promissory  note  or  acceptance,  or  his  bank- 
er's acceptance,  amounts  also  to  borrowing.  The 
entire  capitalist  credit  system,  in  all  its  ramifica- 
tions, is  the  outcome  of  selling  commodities  for 
future  money. 

Credit  can  be  traced  back  for  thousands  of  years, 
but  the  capitalist  credit  system  differs  essentially 
from  the  ancient  and  pre-capitalist  lending.  It  is 
inseparable  from  the  capitalist  mode  of  production 
in  which  money  is  borrowed  for  the  purpose  of  mak- 
ing profit  in  industry,  while  in  previous  forms  of 
society  money  was  borrowed  by  kings  and  other 
spendthrifts  or  by  the  distressed  poor.  In  the 
course  of  this  subdivision  we  shall  take  occasion 
to  tell  of  the  load  of  interest,  amounting  annu- 
ally to  a  billion  and  a  half  of  dollars,  weighing 
on  the  miserably  poor  ryots  of  India,  a  country 
still  mainly  under  ancient  social  forms.  The  differ- 
ence between  credit  as  a  form  of  exploitation  and 
credit  as  an  aid  to  industry  accounts  for  the  moral 


Functions  of  Money  55 

condemnation  of  former  times  of  the  taking  of  in- 
terest, while  to-day  it  is  considered  most  re- 
spectable. 

The  separation  in  time  of  the  entrance  into  circu- 
lation of  the  commodity  and  of  the  money  of  the 
buyer  creates  a  new  and  distinctive  function  for 
money  as  a  means  of  deferred  payment.  In  the 
sale  and  purchase  itself,  money  figures  only  in  its 
function  of  measure  of  value,  and  then  as  ideal  money 
or  a  promise  of  payment  at  a  certain  due  date. 

In  its  concrete  form  of  circulating  medium  money 
expresses  a  present  relation  of  buyer  and  seller,  its 
r61e  in  any  exchange  being  momentary,  although  its 
mission  is  to  remain  permanently  in  circulation,  un- 
like the  commodity  which  drops  out  of  circulation  and 
goes  into  consumption.  Money  in  this  function  is 
endowed  with  the  legal  guaranty  of  society  that  it 
is  a  universal  equivalent,  even,  within  certain  limits 
to  be  discussed  later,  if  the  gold  is  represented  by 
mere  tokens. 

But  money  in  its  concrete  form  as  means  of 
deferred  payment  enters  into  circulation  independ- 
ently, a  reflection  of  a  past  relation,  at  a  time  when 
the  commodity  has  dropped  out  of  circulation  and 
has  perhaps  been  consumed.  Instead  of  the  social 
guaranty  of  money  as  medium  of  circulation,  the 
seller  has  the  merely  juridical  guaranty  of  a  private 
person.  As  in  circulation  mere  tokens  are  symbols 
of  money  and  are  made  legal  tender,  so  now  the 
buyer  himself  becomes  symbolic  of  money,  and  his 
obligation  is  made  legally  enforcible.  The  relation 
of  seller  and  buyer  has  produced  the  new  relation 


56  Capital  To-Day 

of  creditor  and  debtor.  If  the  latter  fails  to  pay 
at  maturity,  the  state  authorizes  the  forced  sale  of 
his  belongings.  When  money  functions  as  means 
of  circulation,  value  is  covered  by  value  in  the  act 
of  purchase  and  sale.  With  the  sale  of  commodi- 
ties for  money  in  its  function  of  means  of  deferred 
payment,  the  existence  of  the  equivalent  of  the 
commodities  sold,  either  in  money  or  in  other  com- 
modities, is  unknown.  In  practice  this  fact  has 
grown  in  economic  importance  since  the  actual  pay- 
ment of  the  concrete  money  at  maturity  has  given  way 
to  the  mutual  balancing  of  all  obligations  by  special  in- 
stitutions established  for  this  purpose,  leaving  merely 
a  small  proportion  of  all  obligations  to  be  paid  in  gold. 
Thus  the  irresistible  tendency  of  capitalist  society 
to  expansion  has  been  freed  from  the  fetters  imposed 
on  it  by  the  existing  stock  of  money.  It  is  a  highly 
important  phase  of  that  evolution  which  is  to  end 
with  the  demonstration  of  the  impossibility  of  the 
permanent  rule  of  money. 

Just  as  the  functions  of  money  as  measure  of 
value  and  as  means  of  circulation  must  be  united  in 
the  same  money  material,  in  spite  of  the  contradic- 
tions between  these  two  functions,  so  must  that  same 
material  also  perform  the  function  of  means  of 
deferred  payment,  in  spite  of  the  further  contra- 
dictions involved.  These  further  contradictions 
manifest  themselves  in  the  financial  crisis. 

An  interruption  of  the  regular  course  of  production 
from  such  a  cause  did  not  and  could  not  exist  during 
the  prevalence  of  simple  production  of  commodities, 
only  outside  events,  as  war,  crop  failure,  or  pestilence, 


Functions  of  Money  57 

interfered  in  those  days  with  production  and  caused 
occasional  want. 

In  contrast  with  that  period,  the  crisis — industrial 
as  well  as  financial — is  an  inherent  and  unavoidable 
accompaniment  of  the  capitalist  competitive  system 
of  production. 

During  the  period  of  small-scale  production  the 
scarcity  of  commodity  money  occasioned  no  serious 
problem.  But  with  the  development  of  capitalist 
production,  especially  since  its  great  expansion 
which  began  about  the  middle  of  the  last  century,  the 
necessity  of  substituting  imaginary  money,  such  as 
paper  tokens  and  bank  checks,  for  the  deficient  gold, 
made  itself  felt  more  and  more  and  has  created  a  very 
serious  problem.  So  far  this  development  has  pro- 
duced nothing  worse  than  financial  crises  with  partial 
liquidation  through  bankruptcy.  But  the  defect,  as 
already  explained,  is  a  fundamental  one,  and  tends 
irresistibly,  as  our  diagnosis  in  other  chapters  will 
show,  to  a  cataclysm  which  will  prove  the  impossibil- 
ity of  competitive  capitalism.  Nothing  can  stay  this 
outcome,  except  the  previous  transition  of  capitalist 
society  from  competitive  anarchy  into  the  perfect 
monopoly  of  an  oligarchy,  which  can  dispense  with 
money.  The  latter  eventuality,  however,  presents 
little  likelihood,  inasmuch  as  the  process  of  mon- 
opolization is  slower  than  the  development  of 
money.  Every  day  brings  the  latter  nearer  to 
the  critical  point.  Meanwhile  the  financial  mech- 
anism remains  in  a  precarious  situation ;  it  rests  on 
the  faith  in  the  general  solvency  and  the  faith  that 
imaginary  money  is  real  money, — a  faith  which  will 


58  Capital  To-Day 

be  rudely  shaken  by  financial  panics  of  increasing 
severity. 

The  contradiction  between  money  as  a  means  of 
circulation  and  money  as  means  of  deferred  payment 
comphcates,  as  already  stated,  the  question  as  to  the 
sum  needed  in  a  country  at  a  given  time.  It  is 
evidently  impossible  for  financial  experts  to  esti- 
mate even  approximately  the  sum  of  obHgations 
maturing  at  any  time,  inasmuch  as  to-day  an  obH- 
gation  may  be  entered  into,  maturing  four  months 
hence,  and  next  month  another  maturing  in  three 
months,  so  that  the  coincident  maturity  of  many 
obhgations  which  originated  in  the  deliveries  of 
commodities  at  very  different  dates  must  be  assumed. 
Society  relies  on  the  individual  capitalist  concern 
to  make  its  calculations  for  meeting  its  own  obli- 
gations. But  the  individual  capitahst  concern  A 
is  depending  on  prompt  payment  by  B,  and  what  if 
through  any  disturbance  the  chain  of  credit  breaks? 
One  bankruptcy  brings  on  another,  confidence  is 
shaken,  and  creditors  who  have  been  seUing  for  ideal 
money  now  storm  the  debtors  for  real  money.  The 
crisis  is  on.  In  it  the  visionary  and  nebulous  shape 
of  money,  which  in  the  sale  had  served  only  in  its 
function  of  measure  of  value,  suddenly  assumes  the 
definite  shape  of  means  of  payment,  or  its  cash 
reality. 

On  the  other  hand,  the  more  specific  industrial 
crisis,  of  which  the  various  causes  may  be  summed  up 
in  the  two  words,  "planless  production,"  tends  to 
disappear  more  and  more  with  increasing  concen- 
tration.    These    causes,    analyzed    by    Marx    with 


Functions  of  Money  59 

arithmetical  precision,  are  therefore  losing  economic 
importance  in  our  time. 

The  condition  of  disturbance  or  crisis  would  recur 
much  more  frequently  than  is  actually  the  case,  if 
there  did  not  exist  perennially  a  reserve  fund  which 
can  be  drawn  upon  in  ordinary  times  to  replace  the 
broken  links  in  the  chain  of  credit.  The  existence 
of  this  reserve  fund  is  not  the  result  of  the  forethought 
and  conservatism  of  the  individual  capitalists,  the 
great  majority  of  whom  are  only  intent  on  doing 
all  the  business  they  can  with  the  capital  at  their 
command.  It  is  the  capitalist  system  itself  which 
compels  the  creation  and  constant  renewal  of  a 
reserve  fund  of  money. 

Let  us  observe  a  capitalist  (or  a  combination  of 
capitalists)  starting  an  industrial  enterprise. 

In  the  first  place  before  he  can  realize  a  revenue 
from  surplus  product  he  must  be  in  possession  of 
an  additional  sum  of  money  above  his  investment  to 
enable  him  to  live  for  a  considerable  time  in  his 
established  style.  This  money  remains  idle  to  a 
diminishing  degree  until  used  up. 

Suppose  next  that  his  investment  is  $15,000,  the 
weekly  requirement  for  material  and  wages  $1000, 
the  period  of  production  ten  weeks  and  of  circulation 
five  weeks.  At  the  end  of  the  fifteenth  week  the 
capital  is  spent,  but  at  the  same  time  part  of  the 
money  returns.  Now,  if  the  manufactured  article 
is  sold  in  arbitrary  quantities  and  each  unit  requires 
ten  weeks  for  its  production,  all  the  capitalist  will 
collect  at  the  end  of  the  fifteenth  week  is  the  value  of 
the  first  week's  product  or  $1000,  just  sufficient  for 


6o  Capital  To-Day 

the  continuity  of  the  process  of  production.  If, 
on  the  other  hand,  the  product  is  an  indivisible  entity 
and  has  required  ten  weeks  for  its  completion,  then 
the  amount  returning  at  the  end  of  the  fifteenth  week 
will  be  $10,000,  or  $9000  more  than  required  for 
reproduction  for  the  time  being.  These  $9000  are 
thrown  out  of  function  again  and  again. 

An  extensive  manufacturer  of  larger  units  of  prod- 
ucts may  say  that  he  is  not  cognizant  of  any  such 
ebb  and  flood  tide  in  his  concern.  Nevertheless 
it  exists  mathematically,  although  concealed  by  ele- 
ments of  taking  and  giving  credit,  prompt  or  slow 
collections,  varying  extent  of  stocks  of  material  and 
products,  fluctuations  in  prices,  etc. 

Let  us  now  assume  that  the  capitalist,  in  addition 
to  the  $15,000  advanced  for  raw  and  accessory  mate- 
rials and  wages,  has  also  invested  for  this  business 
$10,000  in  machinery  and  tools.  Besides  the  neces- 
sary repairs  which  he  will  probably  charge  to  expense 
account,  there  exists,  in  spite  of  the  repairs,  an 
element  of  physical  depreciation,  irremediable  with 
age,  and  also  of  moral  depreciation  on  account  of 
the  invention  of  improvements.  This  physical  and 
moral  depreciation  enters  pro  rata  into  the  value  of 
each  unit  of  the  product  and  returns  in  money  form 
to  the  capitalist.  If  the  normal  life  of  his  machinery 
is  put  at  ten  years,  there  will  have  accumulated  at 
the  end  of  each  year  $1000,  or  at  the  end  of  the  period 
the  $10,000  necessary  for  replacement.  During  these 
years  the  machinery  has  continued  to  function,  or  at 
least  in  part,  and  its  owner  has  held  the  depreciation 
reserve  for  amortization  in  the  form  of  hoarded  money. 


Functions  of  Money  6i 

With  every  turn-over  there  remains  in  the  hands  of 
the  industriaHst  a  deposit  of  profit  which  cannot  be 
immediately  employed  as  additional  capital,  because 
the  technical  composition  of  modern  industry  re- 
quires a  certain  minimum  outlay  for  machinery, 
as  well  as  corresponding  material  and  wages.  Until 
the  accumulation  has  reached  the  necessary  mini- 
mum for  an  enlarged  scale  of  production,  this  money 
does  not  function  as  industrial  capital,  but  remains 
a  hoard  in  the  hands  of  the  industrial  capitalist. 
Even  the  large  corporation,  identified  with  and  sup- 
ported by  the  great  banking  capital  and  therefore 
independent  of  such  accumulation  for  its  expansion, 
creates  a  surplus  which,  aside  from  its  regular  pur- 
poses, enables  the  corporation  to  pursue  an  estab- 
lished dividend  poHcy,  if  thought  desirable  by  those 
in  control. 

Many  capitalists  collect  continually  smaller  sums 
from  many  quarters  which  they  are  obliged  to  arrest 
in  their  circulation  and  retain  as  a  hoard  in  order 
to  be  certain  of  being  able  to  meet  a  larger  obhgation 
maturing  at  a  future  date;  or  they  may  accumulate 
such  funds  with  a  view  to  using  them  for  purchases 
in  more  favorable  market  conditions,  or  for  other 
purposes. 

The  expression  "hoard"  in  these  pages,  then, 
signifies  money  which  is  temporarily  arrested  in  its 
circulation  and  out  of  function  as  capital,  in  conse- 
quence of  laws  inherent  in  the  capitalist  system  and 
operating  permanently.  In  the  sense  used  here 
the  term  has  no  relation  to  the  action  of  people  in 
times  of  panic  when  they  hide  all  the  money  they  can 


62  Capital  To-Day 

as  the  only  thing  in  which  rests  safety  or  profitable 
possibiHties ;  nor  to  the  old  stocking  of  our  progenitors 
which  has  a  more  pathetic  counterpart  in  the  back- 
ward land  of  India.  It  will  be  helpful  to  the  under- 
standing of  other  passages  in  this  book  to  refer  more 
than  cursorily  to  the  hoarding  of  money  in  the  old 
sense  of  the  term  in  that  important  country. 

Much  of  the  silver  painfully  dug  out  of  the  earth 
by  poor  humanity  in  Mexico  and  Peru  in  the  seven- 
teenth and  eighteenth  centuries  was  as  assiduously 
buried  again  by  poor  humanity  in  India  who  received 
it  from  Europe.  The  import  of  silver  into  India 
(from  England  and  China)  was  about  £12,000,000 
yearly  in  the  middle  of  last  century.  This  has  been 
going  on  ever  since,  even  on  somewhat  increasing 
scale  (the  amount  of  precious  metal  imported 
directly  from  England  having  been  £14,000,000 
in  1905-6),  yet  the  known  circulation  of  money  in 
India,  according  to  the  report  of  the  U.  S.  Director 
of  the  Mint, '  was  only  $.78  per  capita,  compared 
with  $52.81  per  capita  in  Australia. 

This  individual  hoarding  expresses  the  fear  of  the 
vicissitudes  to  which  the  workers  are  exposed  in  an 
almost  purely  agricultural  and  fertile  country,  but  in 
which  the  primitive  conditions  have  become  dis- 
located by  the  forcible  introduction  of  capitalistic 
changes.  Thus  it  is  that  famines  occur,  that  the 
worker  consumes  his  seed  corn  and  beasts  and  then  in 
the  last  extremity,  when  the  choice  has  narrowed 
down  to  death  or  practical  slavery  for  himself  and 
progeny,   the  distressed  man  turns  to  the  money- 

'  Report  1912,  p.  67. 


Functions  of  Money  63 

lender  to  enable  him  to  buy  his  means  of  production 
and  to  tide  him  over  until  the  next  crop. 

Sir  Andrew  Fraser,  in  Among  the  Indian  Rajahs 
and  Ryots  (published  191 1),  informs  us  that  the  rate 
of  interest  in  country  districts  used  to  be  fixed  by 
custom  at  25%  for  six  months.  An  anti-usury  law 
had  the  opposite  from  the  intended  effect,  because 
then  the  lender  deducted  the  25%  beforehand,  which 
raised  the  real  rate  to  33/i%  for  six  months.  Upon 
the  abrogation  of  the  law  many  lenders  continued  the 
practice  of  deducting  the  interest  from  the  principal 
in  advance,  so  that  the  prevailing  rate  of  interest  is 
to-day  50  to  66^%  on  an  indebtedness  of  the  agri- 
cultural community  of  £500,000,000.  The  parasite 
takes  the  entire  product,  except  what  is  absolutely 
necessary  to  the  existence  of  the  worker,  therefore  it 
is  easy  to  understand  that  the  debts  never  decrease, 
but  always  increase,  in  spite  of  the  "habits  of  pru- 
dence and  thrift  characteristic  of  the  people  gener- 
ally" to  which  Fraser  testifies.^ 

As  capitaHst  society  develops  in  a  country  the 
individual  hoards,  produced  automatically  as  de- 
scribed, take  more  and  more  the  form  of  social  capital. 
Collecting  the  individual  hoards  and  placing  them  at 
the  disposal  of  the  money  market  is  the  function  of 
the  banks.  There  are  considerations  of  individual 
expediency  regarding  the  extent  to  which  capitalists 
will  leave  funds  in  banks  of  deposit  subject  to  check 

'  In  addition  to  this  load,  India's  excess  of  exports  over  imports 
is  about  £30,000,000  yearly,  mostly  in  payment  for  "good  govern- 
ment." This  excess  is  all  paid  for  in  London.  Besides  India  pays 
for  the  army  to  keep  her  in  order,  etc. 


64  Capital  To-Day 

at  no  interest  or  on  time  at  low  rates  of  interest. 
For  it  is  not  the  purpose  of  capitalists  to  accommo- 
date society  at  large,  but  to  make  profit — in  fact  as 
much  profit  as  possible.  The  credit  relations  thus 
organized  or  extended  by  the  banks  have  further 
resulted  in  public  "security"  markets  or  stock 
exchanges  where  the  hoards  of  the  industrial  capital- 
ists can  be  invested  for  shorter  or  longer  periods  in 
bonds  and  stocks  yielding  the  current  rate  of  interest. 

Hoarding  on  a  social  scale,  finally,  is  imposed  on 
the  banks  themselves  for  seasonal  demands  of  money, 
as  for  instance  for  moving  the  crops,  or  quite  tempo- 
rarily in  preparation  for  dividend  days,  when  call 
rates  of  interest  are  apt  to  advance  considerably. 

Thus  has  the  individual  hoarding  of  old  become  an 
element  of  social  cooperation,  though  still  conducted 
for  private  profit. 


CHAPTER IV 

THE  HANDICAPS   OF  THE  MONEY   SYSTEM 

a.  Wastefulness  of  the  gold  basis. 

The  total  amount  of  metallic  money  in  this  coun- 
try in  1904  was  1994  million  dollars.'  The  quantity 
of  human  labor  expended  in  the  production  of  this 
money,  not  for  any  use,  but  merely  that  we  may  be 
able  to  distribute  our  products  among  ourselves, 
would  have  duplicated  three  fourths  of  all  the  manu- 
facturing buildings  which  existed  in  this  country  at 
the  same  time,  valued  at  2610  millions  (see  p.  175). 

What  is  the  reason  why  capitalist  society  must 
sustain  such  a  dead-weight  or  item  of  faux  frais,  as 
the  French  call  it  ?  The  answer  is  founded  deep  on 
a  general  biological  truth. 

Human  society  is  an  organism  in  course  of  evolu- 
tion along  lines  analogous  to  those  of  individual 
organisms  in  the  organic  world.  This  evolution  may 
be  considered  as  the  gradual  advance  from  physio- 
logical independence  and  social  unconsciousness  of 
the  units  of  the  organism  to  their  physiological 
interdependence  and  social  consciousness. 

Animal  life,  beginning  with  the  free  single  cell, 

'  Statistical  Abstract  oj  the  United  States  (35th),  Table  314. 
S  65 


66  Capital  To-Day 

evolves  a  higher  order  in  the  cohesion  of  a  number 
of  cells,  all  capable  of  the  identical  functions.  This 
stage  is  followed  by  a  degree  of  specialization  and 
interdependence  of  the  cells.  The  final  develop- 
ment is  that  of  complex  organisms  whose  parts  are 
increasingly  interdependent  on  each  other,  until 
absolute  solidarity  and  social  consciousness  of  the 
parts  of  the  whole  organism  are  attained. 

If  human  society  had  achieved  the  stage  of  social 
consciousness,  then  the  production  and  circulation  of 
the  means  of  sustaining  life  would  have  become  the 
function  of  certain  organs  created  by  society  for  the 
purpose  of  predetermining  by  experience  and  statis- 
tics the  quantities  and  varieties  of  products  required 
and  subordinating  the  means  of  production  to  the 
desired  end.  Production  and  distribution  would 
then  be  a  directly  social  relation. 

Under  the  capitalist  system  production  is  con- 
ducted seemingly  as  the  private  business  of  independ- 
ent persons,  but  is  nevertheless  indirectly  social, 
inasmuch  as  the  social  division  of  labor  compels 
these  private  owners  of  the  products  to  enter  into 
social  relations  with  each  other  the  world  over  by  the 
general  exchange  of  their  products. 

The  process  of  exchange  is  the  only  one  in  its 
economy  of  which  society  is  conscious,  and  as  this 
process  is  subsequent  to  that  of  production,  taking 
place  at  a  time  when  it  is  too  late  to  remedy  mis- 
takes or  technical  shortcomings  in  production,  society 
can  only  attest  to  the  social  value  of  the  work  done 
by  individuals  by  giving  for  it  something  of  equal 
solid  value  and  as  such  socially  recognized — namely 


Handicaps  of  the  Money  System     67 

money.     Its  necessity  is  a  corollary  of  an  imperfect 
and  anarchical  system  of  society. 
b.     Inadequacy  of  gold  basis. 

At  first  sight  it  would  seem  contradictory  to  speak 
at  the  same  time  of  the  great  wastefulness  of  money 
by  reason  of  the  great  amount  of  labor  expended 
on  its  production  for  no  rational  purpose,  and  of  its 
insufficiency  for  the  function  it  has  to  perform.  But 
the  seeming  contradiction  is  only  a  reflection  of  the 
enormous  contrast  between  on  the  one  hand  the  small 
value  of  the  more  permanent  wealth  existing  at  any 
one  time,  and  on  the  other  hand,  the  immense  con- 
sumption continuously  going  on,  to  which  must  be 
added  the  immense  sum  of  fictitious  capital  and  the 
price  of  land,  all  of  which  subjects  will  be  more  fully 
dealt  with  in  subsequent  chapters. 

For  the  circulation  of  their  products  earlier  forms 
of  the  commodity-producing  society  required  a  sum 
of  money  equal  to  the  total  price  of  all  commodities 
circulating  alongside  of  each  other  within  a  certain 
space  of  time  and  at  a  given  speed  of  circulation. 

The  development  of  the  new  function  of  money,  as 
means  of  deferred  payment,  has  modified  and  further 
complicated  the  question  as  to  the  mass  of  money 
required  at  any  particular  time.  Theoretically  this 
mass  is  to  be  computed  as  follows: 

total  price  of  all  commodities  circulating  within  a  certain 

space  of  time — 
divided  by  the  number  of  turns  in  which  each  money 

unit  functions  during  that  time — 
plus  the  sum  of  maturing  obligations — 
minus  the  sum  of  balanced  obligations. 


68  Capital  To-Day 

Such  a  formula,  however,  amounts  only  to  a  state- 
ment of  the  problems  involved.  Practical  application 
of  the  elements  of  the  computation  is  impossible 
in  a  society  which  is  not  a  conscious  economic 
organism,  but  rather  an  agglomeration  of  semi- 
independent  units. 

That  the  requirements  for  gold  have  not  been 
lessened  by  the  outgrowths  of,  and  additions  to,  gold 
money  in  its  capacity  as  a  circulating  medium,  such 
as  overvalued  silver  coins,  irredeemable  or  uncovered 
paper  currency,  and  bank  checks,  is  plainly  evident 
from  the  concern  with  which  the  financial  world  is 
continually  estimating  the  prospect  of  the  flow  of  gold 
from  one  country  to  another,  and  from  the  diligence 
with  which  the  banks  of  the  different  countries 
apply  themselves  to  forestall  or  further,  according  to 
the  respective  financial  situations  of  their  countries, 
the  movement  of  relatively  very  moderate  amounts 
of  gold. 

While  thus  the  outflow  of  even  a  few  million  dollars 
gold  is  at  times  viewed  with  an  uncomfortable  feeling 
in  any  country,  much  satisfaction  is  derived  from  the 
good  showing  made  by  those  factors  which  miHtate 
in  opposition  to  gold  exports. 

The  more  permanent  of  those  factors  are  the 
"favorable"  trade  balance  and  income  from  foreign 
investments. 

What  is  called  a  favorable  trade  balance  is  the 
excess  of  exports  of  commodities  over  imports  result- 
ing from  a  home  production  in  certain  spheres  of 
industry  above  the  buying  power  of  the  home  con- 
sumers, although  many  of  these  had  need  of  more  of 


Handicaps  of  the  Money  System     69 

these  products,  as  for  instance  of  foodstuffs  in  the 
United  States/  which  are  largely  exported.  How- 
ever, the  return  of  the  money  advanced  for  the  pro- 
duction of  commodities,  including  the  realization  of 
the  profit,  is  the  final  and  all-important  phase  of  the 
capitalist  system  and  therefore,  as  already  said, 
a  matter  of  eminent  satisfaction  regardless  of  the 
detail  whether  this  is  accomplished  at  home  or 
abroad. 

England  and  France  import  more  than  they 
export.  Nevertheless  the  balance  of  account  with 
foreign  countries  is  in  their  favor  as  a  result  of  their 
income  from  foreign  investments.  This  state  of 
affairs  is  likewise  quite  satisfactory,  according  to 
the  French  author  of  the  report  on  the  Bank  of 
France  to  the  United  States  National  Monetary 
Commission,  where  the  doctrine  is  expressed  that  ' '  it 
is  more  advantageous  for  a  nation  to  cause  other 
nations  to  work  and  to  draw  from  them  2,000,000,000 
francs  yearly  than  to  procure  similar  results  by  work 
at  home.  "^  What  he  has  reference  to  is  the  income 
from  French  investments  abroad,  which  invest- 
ments amount  to  about  thirty  billion  francs.^  As 
the  working  class  is  part  of  the  nation,  the  advantage 
accruing  to  this  class  from  the  investments  in  foreign 

'  An  article  in  the  New  York  Times  Annalist  of  Feb.  9,  19 14,  says 
of  the  period  since  1908:  "...  and  (so  far  as  we  can  get  the  figures, 
which  is  to  the  end  of  191 1)  the  consumption  of  food  per  capita  have 
all  been  decidedly  lower." 

"  National  Monetary  Commission,  The  Bank  of  France  in  its 
Relation  to  National  and  International  Credit,  by  Maurice  Patron, 
p.  14,  Senate  Doc.  No.  494,  6ist  Congress,  2d  Session,  1910. 

3  Ibidem,  p.  13. 


70  Capital  To-Day 

countries  is  apparently  a  corresponding  dispensation 
from  work,  but  it  is  not  stated  that  this  dispensation 
is  accompanied  by  a  share  in  the  income  from  the 
investments. 

We  have  now  discussed  the  leading  outside  factors 
which  influence  the  international  movements  of  gold. 
But  what  about  this  material  itself?  What  is  there 
in  its  own  relation  to  the  financial  system  that  rivets 
the  attention,  and  frequently,  now  in  one  country 
and  then  in  another,  works  on  the  nerves  of  the 
financiers  ? 

In  the  first  place  let  us  look  into  the  world's 
production  of  gold.  According  to  estimates  by  the 
Director  of  the  Mint,  or  figures  adopted  by  him,  ^ 
this  amounted 


Million  dollars 

From  the  discovery 

of  America 

1492  to  1899  to 

9.811 

1900  to  1912  to 

4.964 

Total  14.775 

On  the  other  hand  for  many  years  past  the  con- 
sumption in  the  arts  has  absorbed  fully  one  third  of 
the  annual  production,  in  1912  174  millions  out 
of  466  millions.^  In  addition  to  this  consumption 
"the  movement  of  gold  to  India  continues  to  be  a 
matter  of  world-wide  importance.  ...  It  ap- 
pears that  India  has  taken  during  the  last  two  years 

'Annual  Report  of  the  Director  of  the  Mint,  1913,  p.  315.     As 
everywhere  in  this  book,  we  omit  fractions  of  millions. 
'Ibidem,  p.  259. 


Handicaps  of  the  Money  System     71 

about  28  per  cent,  of  the  world's  production  of 
gold.  "^  The  exports  of  gold  to  India  are  almost 
as  definite  a  deduction  from  the  world's  supply 
of  money  as  is  the  consumption  in  the  arts,  for 
the  reason  that  none  of  this  gold  ever  returns. 
The  bulk  of  it  is  either  hoarded  or  made  into  per- 
sonal ornaments,  the  latter  being  the  only  form 
in  which  the  Hindu  inheritance  laws  permit 
property  to  descend  to  the  female  members  of  a 
family. 

In  the  face  of  these  figures  it  is  no  wonder  that  the 
world's  whole  stock  of  gold  on  Dec.  31,  I9i2,was 
estimated  (with  unimportant  omissions)  at  not  more 
than  the  following^: 

Million  dollars 

United  States 1,880 

British  Empire i  ,482 

France i  ,200 

Russia 1,000 

Germany 863 

South  America 455 

Austria 294 

Italy 248 

Others 1,059 

Total 8,481 

Now  just  what  is  the  significance  of  say  nine  billion 
dollars  gold  in  the  world's  economy? 

There  is  here  only  to  be  considered  the  relation  of 
this  sum  of  gold  to  the  credit  system  in  which,  in  all 

'Annual  Report  of  the  Director  of  the  Mint,  1913,  p.  66. 
'  Ibidem,  p.  64. 


72  Capital  To-Day 

its  vastness,  money  is  the  stated  object  and  consider- 
ation. The  credit  system  includes  all  purely  fictitious 
capital,  like  national  debts,  shares  of  corporations 
capitalized  on  the  proportion  of  their  earning  power 
to  ordinary  interest,  mortgages  on  land  which  has 
no  value  at  all  but  only  a  monopoly  price,  credit 
money  arising  from  deferred  payments  for  commodi- 
ties, such  as  acceptances  and  promissory  notes.  The 
amounts  involved  are  out  of  all  proportion  to  the 
value  of  existing  permanent  capital  and  even  of 
all  wealth.  The  kingdom  of  credit  is  imposing  by  a 
mere  recital  of  its  subdivisions.  To  quote  again 
from  the  enthusiastic  author  of  the  already-mentioned 
Senate  Document  (page  8) : 

Let  us  for  a  moment  consider  these  instruments  of 
credit  which  justly  do  honor  to  our  modern  civilization; 
their  number  increases  constantly;  in  addition  to  bank 
notes,  checks,  transfer  orders,  certificates  of  deposit, 
bills  of  exchange,  bills  payable  to  order,  drafts,  storage 
certificates,  we  have  stock  market  securities,  treasury 
bonds,  mortgages,  warehouse  receipts,  coupons. 

In  this  enumeration  we  miss  promissory  notes, 
which  in  the  United  States  are  of  such  importance 
that  their  discounting  is  the  main  operation  con- 
templated by  the  new  banking  system  established  by 
the  so-called  Glass-Owen  law  enacted  by  the  United 
States  Congress  in  1913,  and  discussed  in  detail  in 
Chapter  VII.,  section  b. 

And  yet  only  the  visible,  negotiable,  and  transfer- 
able instruments  or  evidences  of  credit  have  been 


Handicaps  of  the  Money  System     73 

touched  on,  not  all  credits.  Think  of  all  the  open 
accounts  on  the  books  of  all  business  concerns  in  the 
United  States  and  in  the  whole  world!  They  all 
originated  in  a  value  relation  to  gold  and  are  payable 
in  gold  or  in  money  symbolizing  gold. 

If  it  were  possible  to  translate  all  credits  into  the 
total  sum  of  money  by  which  they  are  supposed 
to  be  redeemable,  that  sum,  like  the  figures  in 
astronomy,  would  transcend  human  appreciation 
and  a  comparison  with  the  nine  billions  gold,  the 
only  absolute  value  basis,  would  cause  one  to  marvel 
how  such  a  highly  artificial  system  can  exist  for  a 
day. 

It  would  be  interesting  to  catch  a  glimpse,  even  if 
only  a  passing  and  imperfect  one,  at  the  figures 
concerned. 

Out  of  the  kingdom  of  credits,  genus  stock  ex- 
change securities,  family  bonds,  we  pick  the  species 
government  bonds.  The  national  debts  of  the  world 
(not  including  state,  provincial,  and  municipal) 
amount  to  about  forty-four  billion  dollars.  ^ 

The  value  of  the  annual  imports  and  exports  of 
the  same  countries  was  almost  as  large,  exceeding 
forty  billion  dollars.^  This  international  commerce 
calls  into  existence  a  portion  of  that  variety  of 
instruments  of  credit  called  bills  of  exchange. 

In  this  international  commerce  the  United  States 
participates  to  the  extent  of  one  tenth.  Here,  as 
everywhere,  the  foreign  commerce  cuts  a  small  fig- 

'  Statistical  Abstract  of  the  United  States,  1914,  p.  693.     This  was 
the  amount  before  the  outbreak  of  the  war  in  1914. 
'  Ibidem,  p.  685. 


74  Capital  To-Day 

ure  compared  with  the  domestic.  In  a  compilation 
of  the  "national"  wealth  essayed  by  the  Census  for 
1904  the  value  of  the  stock  of  products  totaled  fif- 
teen to  twenty  bilHon  dollars.'  The  annual  turn- 
over of  products  varies  of  course  greatly,  according 
to  the  nature  of  each  product,  but  the  total  stock 
existing  at  any  one  moment  must  on  the  average 
be  consumed  and  replaced  a  number  of  times 
during  a  year.  Therefore  the  sum-total  of  the 
domestic  commerce  which  took  place  in  1904  must 
have  been  enormous,  compared  with  our  exports 
during  that  year  of  1460  millions.  ="  Other  coun- 
tries, we  may  be  sure,  show  a  similar  contrast  be- 
tween the  volume  of  their  domestic  and  their  foreign 
trade. 

So  far  as  this  country  is  concerned,  an  approxi- 
mate idea  may  be  gained  from  the  existing  records 
of  bank  clearings.  They  include,  of  course,  the 
foreign  trade  and  the  immense  stock-exchange  trans- 
actions, for  which  however  the  money  turn-over  is 
greatly  reduced  by  the  stock-exchange  clearing- 
house. They  also  include  payments  for  land  which 
are  an  unknown  quantity.  It  is,  however,  easily 
realized  that  the  great  bulk  of  the  bank  clearings 
represents  the  sale  of  commodities. 

Now,  in  the  census  year  1904  and  in  1913,  the 
clearings  and  their  proportion  to  the  stock  of  gold 
in  the  United  States,  including  the  government  stock, 
were: 


'  Statistical  Abstract  of  the  United  States  (35th),  Table  335. 
'Ibid.,  Tabic  242. 


Handicaps  of  the  Money  System     75 

1904    Clearings  102,356  million  dollars 

"       Gold  1,328 

1913    Clearings  I73.I93 

"      Gold  1,905 

This  shows  that  there  existed  in  this  country,  for 
every  $100  cleared,  a  sum  of  gold  in 

1904  of  I1.30 
1913  of    1. 10 

The  progress  of  clearings  during  this  period  has 
been  quite  steady  and  normal  for  each  year,  except 
during  the  year  of  depression  following  the  panic  of 
1907. 

Incidentally  these  figures  show  further  that  (not- 
withstanding the  great  increase  of  gold  production 
since  the  beginning  of  this  century,  equaling  the 
production  of  the  previous  forty  years)  the  stock 
of  gold  has  not  only  gained  no  headway,  relatively 
to  the  total  money  turn-over,  but  has  actually 
shrunk.  And  this  in  the  United  States,  the  most 
favored  country! 

No  such  accurate  records  exist  in  the  United 
Kingdom,  but  we  shall  presently  see  that  its  stock 
of  gold  is  known  to  be  so  nominal  as  to  make  the 
country  more  dependent  on  the  continuance  of  fair 
weather  than  the  United  States. 

The  check  turn-over  of  the  kingdom  was  esti- 
mated to  have  been  over  25,000  million  pounds  in 
1906.  The  banks  are  supposed  to  carry  adequate 
reserves,   but   in  reality    they  deposit   their  entire 


76  Capital  To-Day 

reserves  in  the  Banking  Department  of  the  Bank  of 
England.  The  latter  invests  these  deposits  in 
securities  and  loans,  keeping  only  about  a  third  as 
reserves.  This  is  surely  close  financiering,  but  the 
situation  is  aggravated  by  other  factors.  The 
bankers  of  London  constitute  the  world's  clearing 
house,  and  this  function  subjects  the  London  market 
to  unusual  perturbations.  On  this  account  the  gold 
reserves  of  the  Bank  of  England,  which  means  the 
gold  and  notes  of  the  Issue  Department  held  by  the 
Banking  Department,  fluctuate  greatly.  The  rela- 
tions of  the  two  departments  will  be  explained 
presently.  In  round  million  pounds  these  reserves 
were:  15  in  1885,  13  in  1888,  30  in  1895,  35  in  1896, 
21  in  1899,  and  32  in  January,  1914.  With  these 
fluctuations  correspond  the  frequent  changes  in 
the  Bank's  rate  of  discount,  of  which  there  were 
273  between  1870  and  1907  as  against  only  41  of  the 
Bank  of  France  during  the  same  period. 

Furthermore  England's  imports  exceed  the  exports 
(in  1906  by  147  milHon  pounds).  This  creates  a 
natural  tendency  toward  an  outflow  of  gold,  held  in 
check  by  the  income  from  foreign  investments  (which 
are  estimated  at  4000  milHon  pounds),  income  from 
maritime  carrying  trade,  and  India's  tribute. 

In  order  to  prevent  over-issues  of  bank  notes 
which  had  so  often  caused  panics  in  England,  the 
Peel  Act  of  1844  separated  the  note  issue  department 
of  the  Bank  from  its  banking  business.  The  Issue 
Department  was  only  to  issue  notes  to  persons 
depositing  an  equal  amount  of  gold  with  it.  Aside 
from  such  covered  notes,  the  Issue  Department  could 


Handicaps  of  the  Money  System      77 

only  issue  notes  for  the  amount  of  the  debt  which 
the  government  owed  to  the  Bank  and  for  some 
minor  items,  in  all  at  present  £18,450,000.  It  is 
plain  that  the  gold  in  the  Issue  Department  is  a 
fiduciary  fund,  belonging  to  the  holders  of  notes  and 
held  subject  to  any  call  for  their  redemption,  just  as 
our  Treasury  has  the  exact  amount  of  gold  against 
our  circulation  of  gold  certificates. 

It  is  necessary  to  understand  that  the  relations  of 
the  Banking  Department  to  the  Issue  Department 
are  essentially  the  same  as  those  of  any  other  bank 
or  person.  Nevertheless  the  Peel  Act  has  been 
suspended  four  times  during  panics,  giving  the  Bank- 
ing Department  access  to  the  treasure  held  by  the 
Issue  Department  in  trust  for  others;  otherwise  the 
Bank  of  England  would  have  failed. 

There  are  some  students  of  fmance  who  realize  the 
precariousness  of  the  proportion  of  the  gold  reserve  to 
credits  in  England.  In  proof  of  this  it  is  necessary 
to  quote  from  the  aforementioned  report  on  the 
Bank  of  France,  p.  no,  inasmuch  as  Senate  Docu- 
ment 591,  dealing  with  the  Bank  of  England,  is 
strangely  silent  on  this  topic: 


At  a  meeting  of  the  Bankers'  Institute,  which  was  held 
in  London  in  November,  1906,  the  insufficiency  of  the 
reserve  was  discussed.  It  was  recognized  that,  in  general, 
the  banks  do  not  appear  to  realize  the  necessity  of  having 
sufficient  reserves  to  maintain  the  immense  credit  struc- 
ture they  must  support.  .  .  .  The  last  crisis  has  especi- 
ally drawn  attention  to  the  general  scarcity,  and  every 
country  has  perceived  that  it  lacked  gold  [p.  iii]. 


78  Capital  To-Day 

The  New  York  Times  of  Jan.  24,  1914,  contained 
a  one-column  telegram  from  London,  beginning : 

Sir  Edward  Holden,  Chairman  of  the  London  City  and 
Midland  Bank,  has  raised  an  alarm  as  to  the  inadequacy 
of  the  British  gold  reserves,  which  is  attracting  serious 
attention.  For  a  long  time  past  he  has  advocated 
publication  by  the  joint  stock  banks  of  their  gold  reserves, 
arguing  that  the  present  system,  whereby  only  the  Bank 
of  England  is  bound  to  make  such  an  exposition  .  .  . 
constituted  a  national  danger. 


What  Holden  is  after,  is  to  make  the  joint  stock 
banks  turn  their  pockets  inside  out  so  that  it  may  be 
publicly  realized  to  what  extent  the  gold  reserves, 
supposed  to  exist  there,  are  an  actuality  or  only  a 
myth,  having  been  already  accounted  for  in  the 
Bank  of  England  reserve,  where  they  are  deposited 
by  the  joint  stock  banks. 

In  the  further  course  of  his  statement  Holden 
refers  to  the  foreign  and  colonial  banks  in  London, 
regarding  the  magnitude  of  whose  operations  we 
are  left  in  the  dark,  saying : 

We  have  at  the  present  time  carrying  on  banking 
operations  and  creating  credit  in  London  no  fewer  than 
120  foreign  and  colonial  banks.  The  credit  created  here 
by  the  operations  of  these  banks  really  is  based  on  the 
small  gold  reserve  in  the  Bank  of  England,  which  works 
between  a  minimum  of  £24,000,000  and  a  maximum  of 
£40,000,000  sterling.  The  gold  in  the  Issue  Department 
is  largely  contributed  through  a  portion  of  the  reserve 


Handicaps  of  the  Money  System      79 

of  the  joint  stock  banks  being  held  in  the  Bank  of  England 
and  also  through  notes  which  are  held  by  bankers  and 
by  the  public.  The  total  liabilities  on  current  and 
deposit  accounts  of  the  joint  stock  banks  of  this  country, 
including  the  banks  of  Scotland  and  Ireland,  amount 
approximately  to  £860,000,000  sterling,  while  the  total 
amount  due  to  depositors  in  the  Post  Office  and  Trustee 
Savings  Banks  is  about  £250,000,000  sterling. 

What  troubles  Holden  is  the  thought  of  what 
would  happen  to  the  "credit  created  here  by  the 
operations  of  these  [foreign  and  colonial]  banks" 
and  which  was  "based  on  the  small  gold  reserve  in 
the  Bank  of  England, "  if  the  joint  stock  banks  were 
to  need  that  portion  of  their  reserve  which,  by  way 
of  the  Banking  Department,  contributed  largely  to 
the  gold  in  the  Issue  Department  and  if  at  the  same 
time  the  "notes  [Bank  of  England  notes]  which  are 
held  by  bankers  and  by  the  public"  were  presented 
for  redemption  in  order  to  export  the  gold  on  account 
of  the  state  of  exchange. 

In  Germany  the  discount  rate  is  generally  higher 
than  in  England  and  France,  but  as  it  is  not  always 
feasible  to  protect  the  gold  by  raising  the  rate  high 
enough,  other  means  are  applied  to  this  purpose. 
A  demand  for  gold  may  be  met  by  a  bureaucratic 
frown  from  the  director  of  the  Reichsbank  and  a 
hint  that  insistence  on  gold  might  be  injurious 
to  the  business  of  the  appHcant,  who  readily  inter- 
prets this  as  meaning  a  rejection  of  his  discounts 
and  possibly  a  closing  of  his  account. 

The  following  is  an  indication  of  the  close  financier- 
ing of  Germany: 


8o  Capital  To-Day 

In  order  to  reduce  the  demands  for  gold,  which  became 
alarming,  a  circular  was  sent  at  the  end  of  December, 
1907,  to  all  public  officials,  recalling  another  circular, 
quite  recent  but  already  forgotten,  which  advised  officials 
to  take  their  salary  in  bank  notes  and  not  to  insist  upon 
gold.^ 

In  1898  the  note  circulation  of  the  Bank  of  France 
was  covered  to  the  extent  of  more  than  100%  by 
metallic  reserves,^  which  dwindled  down  to  68%  of 
the  note  circulation  in  the  first  week  of  February, 
1914.3 

This  institution  resorts  occasionally  to  the  expedi- 
ent of  dodging  gold  payments  by  tendering  silver 
(which  is  legal  tender)  or  charging  a  discouraging 
premium  on  gold. 

Having  reviewed  the  status  of  the  gold  supply 
in  the  principal  countries,  the  question  is  now  in 
order  as  to  the  meaning  of  their  great  solicitude 
for  their  little  piles  of  the  yellow  metal.  It  is  as  if 
its  guardians  were  addressing  the  capitalists  in  this 
wise: 

We  know  that  the  balance  of  account  with  foreign 
countries  has  to  be  settled  in  gold  or  in  something  else 
acceptable  to  them;  we  know  that,  as  our  raising  the 
discount  rate  tightens  money  all  around,  the  need  of 
money  induces  forced  sales  of  commodities  and  stock 

'  Sen.  Doc.  No.  494,  6ist  Cong.,  2d  Sess.,  1910,  p.  iii. 

'  Ibidem,  p.  i6. 

3  New  York  Times  Annalist,  Feb.  9,  19 14,  p.  176:  Note  circulation 
6029  million  francs;  gold  on  hand  3459  million  francs,  silver  650 
millions. 


Handicaps  of  the  Money  System      8i 

exchange  securities,  and  that  the  account  due  to  the 
creditor  country  must  be  settled  with  commodities  or 
securities  at  the  decimated  prices  resulting  from  this 
process.  The  losses  to  you  from  the  low  prices  will  be 
exceedingly  severe,  but  they  will  be  the  lesser  evil  by  far 
compared  to  a  suspension  of  specie  payments  with  its 
disastrous  consequences — a  depreciating  currency  and 
the  unsettlement  of  all  values. 

Such  were  the  conditions  presented  by  the  Baring 
panic  in  1890  when  England  was  obliged  to  return 
American  investments  to  the  United  States.  The 
latter  country,  during  its  own  panic  of  1893,  exported 
securities  estimated  at  237  million  dollars  at  "bargain 
prices." 

In  the  Baring  panic  the  Bank  of  England  would 
have  been  obliged  to  suspend,  if  it  had  not  been  for 
the  assistance  lent  to  it  by  the  Bank  of  France.  Had 
the  suspension  not  been  prevented  by  the  French 
bank  the  whole  world  would  have  been  disastrously 
affected. 

The  modern  credit  system  is  a  complex  and  highly 
developed  social  organism.  While  each  nation 
aims  naturally  to  protect  itself  in  the  first  place,  yet 
an  injury  to  one  capitalist  nation  communicates 
itself  promptly  to  all  the  others.  This  has  been  a 
regularly  observed  phenomenon.  Even  the  New 
Zealand  crisis  had  a  world-wide  effect.  The  vast 
credit  system,  social  in  its  nature,  rests  on  the  very 
narrow  basis  of  the  existing  stock  of  money,  and 
being  an  organism  of  a  very  high  order  is  correspond- 
ingly sensitive,  especially  in  relation  to  its  basis  of 
existence — gold.     It  is  a  fact  in  nature  that  the 


82  Capital  To-Day 

higher  the  organism  and  the  more  complete  its 
integration,  the  more  sensitive  it  becomes.  Certain 
worms  may  be  cut  into  several  pieces  and  each  piece 
will  reconstitute  the  complete  animal;  the  starfish 
can  reproduce  its  arms ;  the  sea-slug  its  stomach ;  the 
lobster  its  claws;  the  spider  its  legs;  the  fish  its  fins; 
the  Hzard  its  tail;  but  in  the  higher  organisms  an 
injury  to  a  part  is  beyond  repair  and  may  be  fatal  to 
the  whole. 

Of  the  world's  annual  production  of  gold  more 
than  half  is  derived  from  two  countries — South  Africa 
and  Australia.  In  the  first-named  country  there 
exists  a  state  of  class  antagonism  which  in  191 3 
broke  out  into  a  condition  closely  resembling  a  state 
of  civil  war,  with  the  whole  army  on  a  war  footing,  a 
proclamation  of  state  of  siege,  suspension  of  law,^ 
and  prohibition  of  code  words  in  foreign  cable  dis- 
patches. The  workers  were  beaten  into  submission. 
In  Australia,  where  the  workers  have  the  vote,  there 
exists  a  labor  party  at  present  about  equal  to  the 
combined  strength  of  the  other  parties. 

It  has  been  said  that  the  coal  miners  and  trans- 
portation workers  occupy  strategical  positions  in 
coming  class  contests.  If  this  anticipation  has  any 
value,  may  it  not  be  that  the  gold  diggers  in  those 
outlying  regions,  the  Transvaal  and  Australia,  hold 
the  lever  at  an  equally  dangerous  point  in  our  social 
system,  the  gold  supply  ? 

The  London  Times,  as  reported  by  the  Annalist 
of  Feb.  9,  1 914,  in  referring  to  the  Union  Govern- 

'  The  deportation  of  English  subjects  has  since  been  somewhat 
atoned  for  by  the  resignation  of  the  Governor  General. 


Handicaps  of  the  Money  System      83 

ment  Economic  Commission,  appointed  to  survey 
conditions  in  the  South  African  mining  fields,  says 
"that  the  proceedings  of  the  commission  have  been 
in  camera,  or  private,  because  of  the  acute  labor 
troubles.  .  .  .  x\s  the  production  of  gold  elsewhere 
in  the  world  had  become  a  stationary,  if  not  a  shrink- 
ing industry,  while  at  the  same  time  the  demand 
for  gold  was  steadily  increasing,  the  economic  effect 
of  a  decline  in  the  Rand's  production,  owing  to  labor 
troubles  alone,  was  a  matter  requiring  serious 
thought."^ 

'The  Annalist  comments:  "If  the  world's  production  of  gold  is 
going  to  decline,  actually  or  relatively,  it  will  be  necessary  to 
increase  the  ratio  of  instrumentalities  of  credit  to  a  certain  gold 
base."  So  the  remedy  for  the  present  deficiency  of  the  gold  sup- 
ply  relative  to  the  volume  of  credit  is  more  credit! 


CHAPTER  V 

MONEY   TOKENS 

a.     General  theory. 

The  analysis  of  value  by  Marx  has  shown  that 
money  originated  in  a  commodity  whose  value  be- 
came by  social  consent  the  standard  of  value  of  all 
other  commodities.  As  such  a  commodity  gold 
continues  to  function  in  international  finance,  in 
which  sphere  it  moves  in  bulk  and  by  weight. 
Within  the  boundaries  and  by  authority  of  states 
certain  arbitrary  quantities  are  coined  into  units  of 
money  which  are  the  legal  tender  to  which  all  money 
obHgations  have  reference. 

Gold,  then,  as  the  standard  of  value,  may  be  called 
the  Standard  Money,  if  we  wish  to  differentiate  it 
from  those  substitutes  in  use  whose  material  is  of  a 
value  inferior  to  that  at  which  they  are  rated  or  of 
no  value  whatever.  Such  substitutes  are  desig- 
nated as  tokens,  and  the  principal  materials  used 
are  silver  and  paper.  They  are  issued  under 
the  same  authority  as  the  gold  coins,  i.  e.,  by  the 
state,  but  their  legal  tender  quality  differs  in  the 
various  countries.  In  some  of  these  certain  tokens 
may  be  legal  tender,  while  in  others,  as  in  the  United 


Money  Tokens  85 

States,  they  are  not  absolute  tenders  for  all  purposes 
or  at  least  may  be  excluded  by  private  contract. 

How  is  it  possible  for  a  state  to  endow  an  intrinsi- 
cally worthless  thing  like  a  slip  of  paper  with  the 
power  of  functioning  as  money  within  its  borders? 

Be  it  noted  first,  in  answering  this  question,  that 
tokens  cannot  perform  all  the  functions  of  money. 
Not  being  value  themselves,'  they  cannot  serve 
as  measures  of  value  any  more  than  anything  impon- 
derable can  serve  as  a  measure  of  weight.  Further- 
more, they  cannot  serve  as  means  of  deferred 
payment,  iDecause  that  function  likewise  requires  a 
money  material  of  standard  value  in  order  that  the 
value  payable  and  receivable  at  maturity  may  be 
fixed  with  exactness,  whereas  tokens  are  subject  both 
to  overvaluation  and  to  depreciation.  The  only 
function  of  which  tokens  are  capable,  and  that  only 
within  Hmitations  presently  to  be  discussed,  is  that 
of  medium  of  circulation. 

It  is  a  common  observation  in  countries  where  gold 
in  active  circulation  is  not  such  an  unusual  sight  as 
with  us,  that  coins  considerably  worn  pass  current 
at  their  face  value.  Similarly,  subsidiary  coins 
everywhere  are  issued  much  below  their  indicated 
metal  values,  our  own  being  worth,  as  silver,  when 
not  worn,  about  thirty-seven  cents  on  the  dollar. 
Evidently  such  worn  coins  or  debased  subsidiary 
silver  coins  are  merely  symbols  of  their  pretended 
value,  continuing  to  circulate  as  if  they  were  other 
than  their  own  shadows.     This  points  the  way  to  the 

•  To  avoid  repetitions  references  to  silver  and  subsidiary  coins 
are  omitted. 


86  Capital  To- Day 

possibility  of  substituting  for  gold  a  paper  currency, 
not  in  the  sense  of  our  gold  certificates,  which  are 
representative  of  corresponding  coins  stored  in  the 
Treasury,  but  of  an  unsecured  paper  currency.  It 
generally  matters  little  whether  the  latter  be  nomi- 
nally redeemable  in  gold  or  frankly  irredeemable. 
For  if  there  is  no  provision,  or  only  inadequate 
provision,  for  its  redemption,  and  if  obtaining  the 
gold  for  this  purpose  is  a  moral,  if  not  physical 
impossibihty,  then  where  is  the  important  distinc- 
tion? The  difference  between  debased  or  over- 
valued coin  and  intrinsically  worthless  paper 
money  is  only  one  of  degree,  not  of  principle,  and 
whoever  insists  on  money  of  full  value  will  have 
the  same  argument  in  refusing  a  40  per  cent,  silver 
dollar,  37  per  cent,  subsidiary  coins,  or  o  per  cent, 
paper  dollar. 

Let  us  now  examine  the  economic  ground  on 
which  rests  the  feasibility  of  a  paper  currency  and 
the  limitations  of  its  use. 

For  the  alimentation  of  the  social  body  the  essential 
thing  is  the  exchange  of  the  privately  produced  use- 
values.  This  exchange  must  be  mediated  by  money 
which,  its  function  performed  between  two  commod- 
ities here,  hurries  away  to  repeat  its  mediation  else- 
where. This  ephemeral  role  of  money  in  the  process 
of  exchange,  like  the  quasi-social  character  of  money, 
is  concealed  by  the  fact  that  it  is  itself  value,  as  is 
the  commodity.  Being  thus  devoid  of  any  impor- 
tance in  itself  as  regards  the  social  alimentation,  and 
being  a  quantitatively  insufficient  and  clumsy  tool, 
as  well  as  causing  unprofitable  expense,  its  ehmi- 


Money  Tokens  87 

nation  by  means  of  tokens  and  other  contrivances  has 
always  been  aimed  at.  The  modern  state  has  dis- 
covered that  it  may  substitute  largely,  by  its  author- 
ity as  the  supreme  organ  of  society,  the  directly  social 
paper  tokens  issued  by  itself,  for  the  indirectly  social 
gold,  originating  in  private  production.  But  as 
society  is  not  yet  a  conscious  economic  organism, 
the  power  of  the  state  to  issue  tokens  is  limited 
in  quantity  by  the  economic  laws  which  are  at  the 
base  of  the  existing  form  of  society. 

The  state  originates  the  paper  token  by  printing 
and  issuing  it  in  payment  of  commodities.  For 
value  received  it  gives  an  acknowledgment  of  a 
non-interest  bearing  debt.  To  the  recipients  the 
acknowledgments  serve  as  the  money  form  of  value 
of  their  commodities,  after  which  the  notes  pass 
current  as  money  from  hand  to  hand.  Theoretically 
they  should  finally  be  received  by  the  governments 
in  payment  of  taxes  and  imposts,  products  and 
services,  but  practically  this  is  far  from  being  the 
case.  If  so  received  by  governments,  these  must 
be  considered  to  have  given  value  against  the  return 
of  their  acknowledgments  of  debt.  Thus  the  cycle 
would  be  complete  and  the  accounts  balanced. 
What,  under  the  theory,  would  have  taken  place 
is  a  simple  exchange  of  commodities  (products  and 
labor  power)  owned  respectively  by  individuals  and 
by  the  state,  the  tokens  having  performed  the  fleet- 
ing function  of  money  in  the  circulation  process. 
In  reaHty  there  exists  nowhere  the  slightest  in- 
tention of  canceling  the  tokens  upon  their  being 
received  by  the  governments,  as  that  would  reduce 


88  Capital  To-Day 

the  sum  of  the  circulating  medium,  whereas  the 
requirements  are  constantly  on  the  increase,  not 
only  absolutely  with  the  increase  of  population, 
but  even,  though  to  a  much  lesser  degree,  per  capita. 
Nor  would  it  be  possible  for  them  to  replace  the 
tokens  in  the  circulation  by  redeeming  them  with 
standard  money,  gold,  of  which  the  enormous 
quantity  needed  for  this  purpose  would  be  practi- 
cally unobtainable. 

In  the  latter  respect  there  is  a  radical  difference 
between  the  redemption  of  tokens  and  of  government 
bonds.  The  United  States  has  paid  off  a  bonded 
indebtedness  much  larger  than  its  token  indebted- 
ness, although  a  redemption  of  the  latter  would  have 
been  out  of  the  question.  The  process  by  which  it 
was  enabled  to  do  this  was  the  following :  the  customs 
duties,  fixed  not  so  much  for  revenue,  as  for  protec- 
tion purposes,  were  made  payable  in  gold,  and  as  the 
receipts  were  in  excess  of  the  needs  of  the  government, 
it  used  the  surplus  to  call  in  bonds,  whereupon  the 
gold  became  again  available  for  the  payment  of 
duties,  and  this  cycle  repeated  itself  over  and  over. 
This  was  possible,  because  the  general  circulation  was 
attended  to  by  tokens.  Thus  on  account  of  the 
constant  inflow  of  gold  into  the  Treasury  a  relatively 
small  amount  of  gold  was  adequate  to  effect  the 
gradual  extinction  of  the  bonded  debt.  The  move- 
ment of  the  gold  was  rotary,  with  the  Treasury  as 
a  point  of  passage  in  each  rotation,  while  redemption 
of  the  tokens  by  standard  money  would  mean  a 
movement  of  gold  in  a  straight  line — away  from  the 
Treasury  into  the  general  circulation,  a  stream  that 


Money  Tokens  89 

would  continue  until  the  whole  face  value  of  the 
tokens  was  replaced  by  gold. 

We  have  already  found  (Chapter  IV.)  that  the  total 
quantity  of  money  needed  in  a  country  results  from 
the  addition  of  the  sums  required  by  money  function- 
ing as  a  circulating  medium  and  as  a  means  of  deferred 
payments  minus  the  balanced  payments.  In  this 
country  the  deferred  payments  are  almost  wholly 
effected  by  checks  of  which  the  clearance  leaves  only 
a  balance  of  about  5%  to  be  paid  in  actual  money. 
The  relative  unimportance  of  these  money  payments 
of  check  balances  is  easily  realized  if  calculated 
on  the  total  clearings  mentioned  in  the  preceding 
chapter,  when  it  will  be  found  that  a  sum  of  thirty 
million  dollars,  set  aside  and  daily  turned  over  at  the 
clearing  houses,  can  do  the  entire  work.  This  seems 
a  small  sum  for  the  settlement  of  the  checks,  when 
compared  with  the  1800  millions  of  money  in  real 
circulation  among  the  people  (outside  of  assets  of 
the  Treasury  and  reserves  of  the  banks).  Further- 
more, any  fluctuations  in  the  volume  of  deferred 
payments,  which  after  all  form  only  a  part  of  the 
clearances,  are  apt  to  follow  the  fluctuations  in  the 
volume  and  speed  of  the  circulation.  Why  circu- 
lation alone  is  considered  in  the  following  pages  the 
above  digression  explains. 

The  fluctuations  in  the  circulation  are  very  con- 
siderable, but  the  latter  can  never  fall  below  a  certain 
minimum  which  is  found  by  experience.  If  we  con- 
sult the  national  clearings  as  the  best  indicator,  we 
find  that  the  figure  of  1908,  in  the  depression  follow- 
ing the  panic  of  1907,  fell  30%  below  that  of  1906, 


90  Capital  To-Day 

while  the  clearings  of  1909  rose  33%  above  those  of 
the  preceding  year.  ^ 

Within  this  minimum  circulation  in  years  of  de- 
pression and  in  such  seasons  of  such  years  of  depres- 
sion when  there  is  no  special  demand  for  currency, 
as  for  instance  for  crop-moving  purposes,  lies  the  limit 
of  the  usefulness  of  tokens.  The  law  of  their  use 
rests  on  their  representative  relation  to  gold,  and 
Marx  formulates  the  law  to  the  effect  that ' '  the  issue 
of  paper  money  must  not  exceed  in  amount  the  gold 
which  would  actually  circulate  if  not  replaced  by 
symbols."^  Of  course  JMarx  relates  this  law  to  a 
minimum  circulation,  but  even  at  the  extreme  ebb 
tide  a  temporary  depreciation  of  the  tokens  may  be 
precipitated  by  the  mere  contingency  rather  than 
by  the  fact  of  the  complete  disappearance  of  gold. 
If  the  channels  of  circulation  become  so  filled  up  with 
paper  as  to  leave  little  or  no  room  for  gold,  the  very 
fear  of  a  depreciation  of  the  paper  currency  will  bring 
it  about. 

Imagine  a  country  possessing  a  certain  stock  of 
gold,  the  major  part  of  which  is  hoarded  as  reserves 
or  stores  of  value  in  the  treasury,  central  and  other 
banks,  and  in  special  funds.  The  active  circulation 
devolves  on  tokens  to  the  amount  of  500  millions  at 
par  with  a  margin  of  free  gold  of  100  millions.  Now 
there  occurs  an  additional  issue  of  paper  money, 
doubling  the  sum  of  tokens  in  circulation.  All 
these  tokens  pretend  to  represent  gold.  This,  how- 
ever, they  are  only  capable  of  doing  within  the  lim- 

'  Statistical  Abstract  of  the  United  States,  1914,  p.  631. 
'  Capital  (American  odition),  vol.  i.,  p.  143. 


Money  Tokens  91 

itations  of  the  economic  law  already  referred  to. 
Presently  it  is  found  that  the  tokens  circulate  at  a 
discount  compared  with  gold . '  What  has  happened  ? 
Being  legal  tenders  the  tokens  are  used  preferably 
to  pay  debts  with,  and  the  gold,  being  apparently 
in  excess  of  the  needs  of  circulation,  retires  therefrom. 
The  fact  of  the  matter  is  that  the  price  of  the  commod- 
ities to  be  purchased  within  a  given  limited  time 
(making  allowance  for  any  irregularity  caused  by 
the  function  of  money  as  means  of  deferred  payment 
as  between  one  period  and  another,  which  irregularity, 
however,  is  not  influential  in  countries  where  such 
payments  are  made  by  checks)  is  only  700  milHons. 
This  total  commodity  value  is  confronted  by  1000 
millions  in  tokens  which  are  the  measure  of  value. 
But  they  are  no  longer  gold  tokens;  they  are  value 
tokens,  a  reflection  of  the  value  of  the  commodities. 
1000  units  in  tokens  now  equal  700  in  gold.  The 
latter  has  itself  become  a  commodity  which  may  be 
sold  and  the  proceeds  used  to  settle  obHgations. 
Gold  as  a  commodity  differs  from  other  commodities 
in  that  it  is  the  only  one  in  which  the  depreciation  of 
the  tokens  appears.  Besides  it  continues  as  the 
world's  money  commodity,  and  it  is  for  this  reason 
that  the  depreciation  of  a  country's  currency  always 

I  In  Faust,  Second  Part,  Mephistopheles  becomes  the  inventor 
of  paper  money.  This  spreads  quickly,  amidst  general  enthusiasm, 
but  does  not  long  remain  at  par: 

"Mit  Blitzsswink  zerstreute  sich's  im  Lauf. 
Die  Wechsler — Banke  stehen  sperrig  auf, 
Man  honorirt  daselbst  ein  jedes  Blatt 
Durch  Gold  und  vSilbcr,  freilich  mit  Rabatt." 


92  Capital  To-Day 

reveals  itself  first  by  an  adverse  movement  of  foreign 
exchange  rates. 

A  firm,  regularly  importing  a  certain  kind  of  pro- 
duct, and  being  expert  in  financial  matters,  will  not 
sell  at  the  market  price,  if  it  foresees  that  the  cost 
of  the  next  importation  might  be  higher  than  the 
price  realized  in  the  sale,  owing  to  a  higher  exchange 
rate.  Therefore  it  will  first  cover  exchange  on  future 
importations,  which  is  the  same  as  saying  that  it  buys 
gold  to  be  paid  out  in  the  country  of  exportation  or  in 
one  of  the  foreign  banking  centres.  Similar  demand 
for  exchange  from  a  number  of  importers  of  com- 
modities (or  at  times  of  securities)  causes  an  advance 
of  the  rate  which  may  rise  to  a  point  where  it  is 
cheaper  to  procure  and  ship  gold.  The  competition 
for  gold  then  results  in  the  payment  of  a  premium, 
which  is  identical  with  a  depreciation  of  the  paper 
currency.  The  depreciation  reacts  immediately  on 
the  prices  of  exportable  goods  and  ultimately  on  those 
of  all  other  things. 

If  the  eventuality  of  even  a  moderate  or  possibly 
temporary  depreciation  is  to  be  avoided,  the  maxi- 
mum paper  issue  must  remain  below  the  minimum 
circulation  by  such  a  margin  as  to  compel  the  en- 
trance into  circulation  of  some  gold  at  all  times.  As 
long  as  gold  fills  up  part  of  the  needed  circulation 
the  paper  will  remain  a  symbol  of  gold  whose  value 
is  reflected  in  it. 

What  is  said  here  of  a  paper  currency  in  excess  of 
the  minimum  requirements  of  money  holds  good  for 
a  circulation  of  silver  or  a  combination  of  both,  except 
that  while  paper  issued  to  excess  may  become  utterly 


Money  Tokens  93 

worthless,  silver  coins,  which  are  practically  bills 
printed  on  metal,  cannot  depreciate  below  their  melt- 
ing value. 

The  historical  instances  of  great  depreciation, 
followed  generally  by  repudiation  of  paper  money, 
are  not  few  in  number.  The  large-scale  experiment 
of  the  French  Revolution  with ' '  assignats  "  ended  with 
repudiation.  England,  until  the  passage  of  the  Peel 
act  in  1844,  w^^  again  and  again  shaken  by  panics 
and  the  bankruptcy  of  the  paper  issues  which  had 
caused  them.  The  colonial  governments  of  the 
North  American  colonies  again  and  again  repudiated 
their  notes.  What  became  of  the  Continental  bills 
issued  by  the  federal  government  during  the  War  of 
Independence  is  remembered  by  the  expression  of 
utter  disparagement  of  the  worth  of  a  thing:  "not 
worth  a  Continental.  "  The  Confederacy  met  rising 
prices  by  fresh  issues  of  paper  (which  raised  prices) 
until  Richmond  market  prices  in  May,  1864,  were: 
boots  $200;  coats  $350;  flour  $275  per  barrel;  beans 
$120  per  bushel;  butter  $15  per  pound.'  Even  our 
greenbacks  at  one  time  were  down  to  35  cents  gold. 

It  is  this  quantitative  aspect  of  money,  put  into 
relief  by  the  history  of  depreciation  and  repudiation 
of  paper  money,  that  has  led  the  poHtical  economists 
and  similar  "authorities"  even  to  this  day  to  transfer 
the  quantity  idea  indiscriminately  to  all  money, 
hence  also  to  gold.  They  cannot  afford  to  notice, 
much  less  to  acknowledge,  the  Marxian  theory  of 
value,  on  account  of  its  far-reaching  consequences 
(to  which  we  will  devote  a  later  chapter) ,  and  they 

I  Enc.  Brit.,  9th  ed.,  vol.  23,  p.  776. 


94  Capital  To-Day 

therefore  look  in  any  direction  but  the  right  one  for 
an  explanation  of  changes  of  money  value.  This 
quantity  idea  we  shall  treat  more  fully  in  the  next 
division  of  this  chapter. 

In  spite  of  the  teachings  of  history,  there  have 
arisen  in  our  own  generation  and  country  three 
distinct  political  movements  having  as  their  object 
the  arbitrary  augmentation  of  the  circulating  medium 
by  tokens.  The  earlier  ones  (the  Greenback  and 
People's  parties)  demanded  a  redundant  paper  cur- 
rency ' '  based  on  the  credit  of  the  nation. ' '  The  more 
recent  one  was  engineered  by  the  Democratic  party 
under  the  leadership  of  Bryan,  and  demanded  the 
free  and  unlimited  coinage  of  silver  at  the  ratio  of 
1 6  to  I.  All  these  movements  were  essentially  of  the 
debt-laden  middle  class  against  the  capitalist  class, 
incidentally  menacing  the  interests  of  the  wage- 
working  class.  Their  defeat  at  the  polls  on  the 
square  issue  does  not  disprove  the  possibility  of  a 
measure  of  success  for  similar,  though  perhaps  less 
sweeping,  demands  by  even  an  inconsiderable  minor- 
ity, if  it  holds  the  balance  of  power  or  if  its  power  is 
otherwise  feared  by  the  politicians,  as  illustrated  by 
the  silver  purchase  acts  which  we  shall  discuss  farther 
on. 

The  Greenbackers,  PopuHsts,  and  Democrats  may 
not  have  cared  about  the  ultimate  consequences 
of  debt-extinguishing  inflation,  and  declamations 
against  the  "gold  bugs"  and  the  "golden  cross"  ap- 
pealed to  their  debt-laden  middle  class  adherents.  To 
the  working  class,  however,  a  correct  understanding  of 
the  nature  of  money  is  of  the  greatest  importance, 


Money  Tokens  95 

in  order  to  be   safe   against  being  led  astray  by- 
financial  will-o'-the-wisps. 

b.  Proof  of  general  theory  by  deviating  hypotheses. 

The  law  governing  the  issue  of  paper  currency  has 
been  stated  in  the  preceding  division  of  this  chapter. 
Let  us  now  proceed  to  an  illustration  of  this  law  by 
the  use  of  various  deviating  hypotheses. 

Suppose  the  total  price  of  commodities  in  circu- 
lation at  a  given  moment  to  be  ten  million  dollars. 
Divide  them  into  two  groups  of  the  aggregate  price  of 
five  millions  each.  These  two  groups  are  to  be  ex- 
changed against  each  other.  The  gold  needed  to 
effect  the  exchange  would  be  five  million  dollars,  be- 
cause, whereas  each  commodity  calls  for  the  dupli- 
cation of  its  value  in  gold,  in  the  act  of  exchange  the 
money  changes  its  place  twice  (or  makes  two  turns), 
while  each  commodity  (or  group  of  commodities,  as 
here  assumed)  changes  its  place  only  once.  In  other 
words,  first  the  owners  of  one  group  of  commodities 
sell  the  same  for  five  million  dollars,  then,  with 
the  money  received  for  the  sold  commodities,  buy 
the  other  group  of  commodities,  thus  completing  the 
exchange. 

Now  imagine  gold  abolished  in  the  country  as 
money,  and  paper  slips  substituted,  to  continue  the 
foregoing  example,  say,  to  the  number  of  a  mil- 
lion, each  of  the  denomination  of  five  dollars.  The 
value  of  the  commodities  in  each  group  swells  to 
seven  and  a  half  million  dollars,  still  confronted  by  the 
unchanged  sum  of  the  paper  slips.  But  the  two  groups 


96  Capital  To-Day 

of  commodities  must  absolutely  be  exchanged  with 
each  other.  They  cannot  be  exchanged  with  each 
other  directly,  but  only  through  the  medium  of 
socially  recognized  mone}^  Therefore  the  sum  of  the 
paper  slips  comes  to  represent  the  increased  value 
of  the  group  of  commodities  which  is  to  be  turned  over 
and  each  slip  acquires  a  buying  power  of  seven  and  a 
half  dollars,  although  its  denomination  is  five  dollars. 
Inversely,  if  the  total  value  of  the  commodities  in 
circulation  be  reduced  to  half,  or  five  million  dollars, 
the  single  slip  will  represent  two  and  a  half  dollars, 
regardless  of  what  is  printed  on  it. 

It  is  thus  seen  that  the  currency  value  of  a  fixed 
volume  of  paper  money  is  determined  by,  and 
fluctuates  with,  the  total  price  of  the  commodities  in 
circulation  at  a  given  moment.  The  original  issue 
of  this  paper  money,  which  purported  to  serve  as  a 
substitute  for  the  previous  gold,  has  been  found  to  be 
subject  both  to  overvaluation  and  depreciation. 

The  hypothesis  of  an  exclusive  paper  currency 
leads  to  the  conclusion  that  such  a  currency  affords 
no  standard  of  value  by  which  can  be  determined 
money  obligations  to  be  fulfilled  in  the  future.  It 
is  true  that  the  paper  currency  continues  after  a 
fashion  to  be  the  measure  of  value  inasmuch  as  the 
prices  of  commodities  are  expressed  in  this  currency, 
but  this  expression  of  prices  is  subsequent  to  the 
revelation  of  the  value  of  the  currency  by  the  volume 
of  commodities  which  are  to  be  turned  over  and  which 
are  themselves  a  variable  value. 

It  may  be  objected  that  gold  also  is  subject  to 
variations  of  value.     These,  however,  are  not  nearly 


Money  Tokens  97 

as  frequent  or  abrupt  as  the  changes  in  the  require- 
ment of  means  of  circulation  caused  by  the  cycles  of 
industrial  expansion  and  contraction.  And  if  history 
has  made  a  mistake  in  selecting  gold  as  the  world's 
money,  by  what  other  single  product  of  labor  could 
capitalist  society  advantageously  replace  it  ? 

So  far  the  supposition  has  been  that  the  paper 
currency  is  a  fixed  quantity.  But  once  the  principle 
of  money  of  value  has  been  abandoned,  what  guar- 
anty is  there  against  undue  augmentation  of  the 
paper?  Whatever  may  have  been  the  theories  or 
forces  which  brought  about  additional  issues  of 
paper,  once  they  are  issued  they  will  thereafter  be 
required  in  the  circulation,  because  of  the  adjust- 
ment of  commodity  prices  to  the  increased  circula- 
tion. Any  subsequent  reduction  of  its  mass  could 
only  be  effected  either  by  gradual  cancellation  of  the 
government's  excess  of  revenue  in  paper  currency 
over  its  expenditure  or  by  the  return  of  the  paper  to 
the  government  by  the  capitalists  to  whom  it  had 
been  issued  as  loans.  As  regards  the  first  mode, 
the  concern  of  most  governments  is  not  so  much  to 
dispose  of  any  surplus,  as  to  discover  new  sources  of 
taxation  and  of  borrowing  to  meet  the  constantly 
increasing  expenditures.  The  latter  mode  is  the  one 
alleged  for  the  Glass-Owen  law. 

The  fundamental  difference  between  paper  money 
and  gold  may  be  summarized  as  follows : 

Paper  money  is  only  of  value  in  circulation,  where 
it  performs  the  social  function  of  facilitating  the 
exchange  of  commodities.  Once  put  into  circulation, 
the  paper  must  stay  there,  because  the  sum  of  such 


98  Capital  To- Day 

money,  however  large  or  small  it  might  be,  is  always 
equal  to  the  total  price  of  the  commodities  it  con- 
fronts, and  is  therefore  needed  in  circulation.  Take 
away  from  paper  the  function  of  medium  of  circula- 
tion, and  it  becomes  utterly  worthless  stuff. 

Gold,  on  the  other  hand,  is  itself  value,  therefore 
available  as  measure  of  value.  It  encounters  the 
commodity  as  an  equivalent.  If  the  need  of  the 
circulating  medium  is  lessened,  gold  departs  from 
the  circulation  to  take  the  commodity  form  or  to 
retire  into  bank  vaults,  or  anywhere  else,  as  a  hoard 
or  store  of  value,  ever  ready  to  act  as  the  world's 
recognized  universal  equivalent.  In  doing  so,  its 
own  value  and  that  of  the  commodity  remain  entirely 
undisturbed;  on  the  other  hand,  a  deficiency  of  gold 
relative  to  the  increased  value  of  the  commodities  in 
circulation  may  be  filled,  within  certain  limits,  by 
tokens  symbolizing  gold,  as  already  stated. 

Gold  circulates  because  it  has  value;  paper  has 
value  because  it  circulates. 

The  value  of  commodities  given,  the  quantity  of 
gold  in  circulation  depends  on  its  value;  the  value  of 
the  paper  in  circulation  on  its  quantity. 

The  price  of  commodities  changing,  the  quantity 
of  gold  in  circulation  changes ;  the  changing  quantity 
of  paper  effects  a  change  in  the  price  of  commodities. 

The  circulation  of  commodities  can  absorb  only  a 
definite  quantity  of  gold,  but  any  amount  of  paper. 

A  state  is  guilty  of  debasing  coin,  if  it  issues  pieces 
ever  so  little  below  the  nominal  weight ;  but  it  is  con- 
sidered to  be  acting  with  perfect  propriety  in  issuing 
tokens  containing  no  metal  whatever. 


Money  Tokens  99 

The  foregoing  considerations  of  an  exclusive  paper 
currency  as  a  national  monetary  system  show  its 
practical  impossibility.  But  even  were  such  a  sys- 
tem practicable,  the  paper  would  only  be  valid 
within  the  country;  for  the  settlement  of  foreign 
and  related  obligations  gold  would  still  be  needed. 
These  obligations  consist  of  government  and  other 
bonds  payable  in  gold  and  adverse  balances  of  account 
of  the  capitalists  of  one  country  with  those  of  another. 
Whether  the  bonds  have  been  placed  entirely  or  only 
partly  abroad,  they  are  based  on  gold  not  only  for 
the  foreign,  but  for  the  home  bondholders.  The 
government,  to  secure  the  gold  needed  for  interest 
and  redemption  of  the  principal,  levies  in  gold  certain 
imposts,  especially  customs  duties.  The  gold  needed 
by  the  capitalists  is  procured  by  them  as  a  commodity 
at  the  market  price  and  is  subject  to  corners,  like  the 
one  on  the  memorable  "Black  Friday"  in  our  history, 
September  24,  1869,  on  which  day  hundreds  of  firms 
and  individuals  were  swept  into  bankruptcy. 

Passing  from  the  consideration  of  the  hypothesis 
of  an  exclusive  paper  currency,  fixed  in  amount,  (an 
unlimited  issue  involves  the  more  serious  danger 
of  great  depreciation),  to  the  other  extreme,  an  hy- 
pothesis of  the  exclusive  use  of  gold  as  money,  (minor 
coin  excepted) ,  with  limited  coinage  of  gold,  we  may 
be  met  at  the  outset  with  the  objection  that  this 
latter  hypothesis  is  entirely  unnecessary  in  view 
of  the  existing  deficiency  in  the  supply  of  gold,  as 
described  in  a  previous  chapter.  But  there  are 
many  people  who  are  under  the  impression  that  there 
exists  of  late  years  a  progressive  depreciation  of  gold, 


100  Capital  To-Day 

owing  to  the  increase  in  the  supply  now  in  existence, 
notwithstanding  the  uncontradicted  fact  that  the 
need  of  gold  remains  undiminished,  to  say  the 
least. 

G.  E.  Roberts,  Director  of  the  Mint,  looked  upon 
in  some  quarters  as  one  of  the  world's  highest  au- 
thorities on  monetary  phenomena,  says  in  his  report 
for  1 91 3  on  the  one  hand:  "That  there  is  a  relation- 
ship between  the  supply  of  gold  and  the  prices  of  com- 
modities scarcely  admits  of  controversy  " ;  and  on  the 
other :  " .  .  .  what  results  would  ensue  from  the  dis- 
covery of  a  cheap  process  of  artificially  producing 
gold.  Will  anybody  contend  that  such  a  discovery 
would  have  no  effect  upon  monetary  .  .  .  condi- 
tions?" If  Mr.  Roberts  were  familiar  with  the 
Marxian  theory  of  value  he  would  have  realized  that 
the  two  statements  above  quoted  are  not  arguments 
along  the  same  line,  but  bear  on  two  different  con- 
ditions, mutually  exclusive  of  each  other. 

The  first  statement  connects  the  supply  of  gold  with 
commodity  prices.  The  latter  are  indicated  by  a 
given  quantity  of  gold.  If  the  value  of  gold  is  to  be 
stated,  it  can  only  be  done  in  terms  of  commodities. 
But  value  expresses  the  quantity  of  labor  crystallized 
in  a  thing,  and  changes  in  value  express  changes  in 
the  quantity  of  labor  necessary  to  reproduce  that 
thing.  Supply  is  not  an  element  in  the  determination 
of  value,  but  merely  affects  the  temporary  market 
price.  Supply  (and  demand)  explains  the  fluctu- 
ations of  the  market  price  which  take  place  without 
there  being  any  change  in  value.  If  supply  and  de- 
mand balance  each  other,  they,  like  any  opposing 


Money  Tokens  loi 

forces  in  nature  in  a  state  of  balance,  cease  to  exist 
as  phenomena.  Consequently  the  operation  of  supply 
and  demand  indicates  nothing  but  a  disturbance  of 
the  equilibrium.     It  cannot  indicate  value  itself. 

The  second  statement  supposes  a  reduction  in  the 
value  of  gold  in  consequence  of  greater  productivity 
of  labor  or,  to  use  an  expression  better  understood  by 
capitalists,  of  lower  cost  of  production. 

The  first  quotation  refers  to  a  fluctuation  in  the 
market  price  of  gold,  a  temporary  condition  to  be 
corrected  by  a  change  in  the  relation  of  supply  and 
demand.  The  second  quotation  refers  to  a  permanent 
change  of  value. 

Which  one  of  the  two  contradictory  statements  of 
the  Director  of  the  Mint  may  be  the  true  one  is  of 
interest  to  us,  as  we  are  concerned  with  a  wide-spread 
belief  that  the  increase  in  the  stock  of  gold  is  the 
reason  for  its  depreciation. 

The  empirical  appearances  do  not  favor  the  hy- 
pothesis of  a  temporary  depression  of  the  market 
value  of  gold  owing  to  its  abundance.  The  concern 
about  the  national  bank  reserves  and  the  com- 
petition in  international  finance  for  the  gold,  re- 
minds us  rather  of  the  too  narrow  blanket  which  is 
pulled  hither  and  thither  by  several  persons  trying 
to  keep  warm. 

Also  we  should  have  expected  a  considerable 
diminution  in  the  gold  output  as  a  result  of  the  depres- 
sion of  its  market  value  and  the  growing  unprofitable- 
ness of  the  mining  industry.  There  has  taken  place 
not  only  no  recession  in  its  production,  but  the  same 
has  actually  advanced  from  about  300  million  dollars 


102  Capital  To-Day 

about  the  turn  of  the  century  to  466  milHons  in  191 2,  ^ 
although  during  the  last  five  years  the  annual  increase 
has  averaged  only  1%.  Evidently  the  gold  mining 
industry  as  a  whole  is  yielding  a  fair  profit  on  the 
capital  employed.  Of  the  Witwatersrand  mines,  col- 
lectively the  largest  producers,  it  is  known  that  their 
profits  in  191 2  and  191 3  equaled  one  third  of  their 
output.  Other  African  and  Russian  mines  were  not 
quite  so  remunerative,  but  one  American  company, 
the  Goldfield  ConsoHdated,  paid  out  over  70%  of  its 
output  in  dividends  in  1911.^  It  is  even  possible 
that,  owing  to  improved  methods  of  production,  or 
the  easier  accessibiHty  to  or  the  better  yield  of  the 
ores,  the  profits  from  gold  production  are  at  present 
higher  than  when  gold  was  of  higher  value. 

It  is  clear,  then,  that  the  recent  depreciation  of 
gold  is  not  a  matter  of  increased  supply,  resulting  in 
a  market  price  lower  than  the  value,  but  of  a  lowering 
of  the  value  itself.  The  industry  continues  to  be 
"socially  necessary  labor"  as  much  as  ever,  and  its 
owners  are  not  under  the  necessity  of  operating  at 
less  than  the  general  rate  of  profit. 

The  quantity  idea  which  is  uppermost  in  Mr. 
Roberts's  mind,  and  which  he  fails  to  separate  from 
the  value  idea,  is  derived  from  the  paper  money  ex- 
periences of  many  countries,  but  it  has  no  relation  to 
gold  which  is  itself  value.  The  argument  of  all  those 
who  think  like  him  amounts  to  this :  we  have  pro- 
duced so  much  gold  that  commodities  have  so  much 

'  Report  of  Director  of  the  Mint,  1913,  p.  314. 
'  Moody's  Manual  of  Railroads  and  Corporation  Securities,  1912, 
p.  3998. 


Money  Tokens  103 

risen  in  price  that  we  have  not  gold  enough  to  pay  for 
them. 

It  follows  then  that  if  there  has  actually  taken 
place  of  late  years  a  depreciation  of  gold,  it  is  not  a 
mere  temporary  fluctuation  of  the  market  due  to 
increased  supply,  but  a  permanent  change  of  value 
due  to  reduced  cost  of  production. 

Under  unlimited  coinage,  gold,  whatever  changes 
in  its  value  might  take  place  in  one  or  the  other 
direction,  continues  as  the  measure  of  value  of  the 
commodities  which  are  all  affected  alike  by  the 
change. 

It  is  true,  however,  that  the  gold  basis,  which  is 
inseparable  from  the  competitive  capitalist  system, 
is  bound  to  work  injustice  to  creditors  or  debtors  by 
any  change  in  the  value  of  the  metal. 

The  above  statement  that  a  change  in  the  value 
of  gold  affects  all  commodities  alike,  calls  for  further 
elucidation  in  view  of  the  fact  that  in  the  rise  of 
prices  during  recent  years,  some  commodities  parti- 
cipated in  a  high  degree,  some  moderately,  while 
still  others  remained  stationary.  These  discrepan- 
cies are  due  to  changes  in  their  own  values  or  prices 
relative  to  the  depreciation  of  gold.  For  instance,  to 
quote  price  advances  of  ordinary  necessaries  of  life 
in  index  numbers ' : 


1900 

1913 

Advance 

Farm  products 

109.5 

165.8 

49.6 

Clothing 

106.8 

123.7 

15-8 

Manufactured  articles 

no. 2 

132 

19.8 

'  U.  S.  Bureau  of  Labor  Statistics,  Bulletin  No.  149,  Wholesale 
Prices,  1890  to  1913,  pp.  11,  13,  and  14. 


104  Capital  To-Day 

Against   all   the  labored   theories  regarding  the 
causes  of  the  high  cost  of  living  we  advance  as  the 
principal  explanation  the  following  points  (realizing 
that  there  are  contributory  ones):  (i)  that  the  com- 
paratively slight  rise  in  the  prices  of  clothing   and 
other    manufactured    articles    corresponds    to    the 
somewhat  slower  technical  progress  in  the  average 
manufacturing  industry  than  has  taken  place  in  gold 
mining  with  its  use  of  high  explosives,  compressed 
air,  electric  power  transmission,  its  improvements 
in  machinery,  reduction  processes,  and  transportation 
— all   this    combined   with   unparalleled    auriferous 
formations,  as  in  the  Rand ;  (2)  that  agriculture  lags 
behind  in  technical  progress,   compared  with  gold 
mining  or  even  with  the  average  of  manufacturing 
industries ;  that  while  its  products,  with  the  exception 
of  meat,  have  actually  somewhat  declined  in  value 
by  reason  of  increasing  yield  per  acre,  due  to  improved 
methods  of  farming,  their  market  prices  advanced 
greatly  from  the  increased  demand  by  the  rapidly 
growing  urban  centers  to  which  there  is  no  counter- 
part in  a  corresponding  increase  of  the  rural  popu- 
lation ;  (3)   that  the  rising  prices  of  the  necessaries 
of  life  are  therefore  due  mainly  to  the  reduced  value 
of  gold,  but  also  to  some  extent  to  an  advance  of  their 
market  prices  beyond  their  values,  the  result  of  mal- 
adjustment of  the  labor  force,  which  is  drawn  away 
from  the  production  of  necessaries  toward  the  pro- 
duction of  luxuries  in  which  the  enormous  and  grow- 
ing revenues  of  the  capitalists  are  spent. 

It  is   sometimes   asserted  that  the  high  freights 
imposed  by  the  Railroad  Trust  are  largely  responsi- 


Money  Tokens  105 

ble  for  the  high  cost  of  foodstuffs;  but  in  Chapter 
VIII.  the  authority  of  the  Secretary  of  Agriculture  is 
quoted  to  show  how  small  a  percentage  of  their 
cost  is  represented  by  freight. 

It  is  sometimes  thought  convenient  to  make  a  case 
out  of  the  advance  in  the  wages  of  agricultural 
laborers.  This  advance  has  been  considerable  and  is 
linked  with  the  general  rise  of  wages  which  has  taken 
place.  But  the  history  of  strikes  teaches  that  they 
are  more  frequently  defensive  than  aggressive,  that 
they  are  the  consequence  rather  than  the  cause  of  a 
higher  cost  of  living.  In  spite  of  the  rise  of  agricultural 
wages,  these  represent  a  declining  quantity  in  the 
following  proportion,  when  compared  with  the  value 
of  the  crops: 

1899    7-6% 

1909     74% 

The  causes  indicated  above  as  the  principal  ones 
which  have  brought  about  the  high  prices  of  the 
necessaries  of  life  are  in  themselves  sufficient  to 
preclude  the  hope  that  the  phenomenon  may  be  only 
a  transient  one.  The  ascending  movement  of  prices 
which  began  in  1897  is  fatally  connected  with  the 
maturing  of  capitaUsm,  and  a  struggle  against  the 
high  cost  of  living  can  be  nothing  else  than  a  struggle 
against  capitalism. 

If  the  depreciation  of  various  "values,"  including 
tokens  and  bank  deposits,  and  of  the  loan  capital,  ^ 

»  One  of  our  popular  magazines  runs  a  department  for  advising  its 
investing  readers.  Each  issue  begins  with  a  "Fable  of  Finance" 
as  a  text  for  the  dispensation  of  some  political  economy  in  which 
the  writer  is  not  consciously  fabulizing,  and  concludes  with  invest- 


io6  Capital  To-Day 

as  well  as  the  rising  cost  of  living,  are  hardships  for 
the  majority  of  the  people, '  then  the  believers  in  the 
supply  doctrine  will  no  doubt  welcome  a  suggestion 
how  to  overcome  these  evils  by  neutralizing  the 
effect  of  gold  depreciation  on  the  value  of  money. 
The  realization  of  the  hypothesis  we  are  now  consider- 
ing of  an  exclusive  gold  currency,  with  limited  coinage, 
would  during  the  few  years  needed  for  the  demand 
to  catch  up  with  the  supply  of  gold,  effect  a  divorce 
between  gold  as  money  and  gold  as  metal,  in  the  same 
manner  as  some  religions  have  effected  a  similar 
divorce  between  the  spiritual  man  and  the  old  Adam. 
The  example  of  our  silver  dollar,  the  five  franc  piece, 
or  the  rupee,  in  their  emancipation  from  the  silver 
price,  proves  that  their  overvaluation  is  maintained 
not  by  any  promise  of  redemption  in  gold,  but  by 
their  being  needed  in  circulation.  Just  so  gold  money, 
in  our  hypothesis,  would  cease  to  represent  gold  as 
given  value  and  instead  its  money  value  would  be 
determined  by  the  needs  of  circulation.     Our  friends 

ment  advice.  To  him  nothing  but  the  increased  gold  supply  has 
"decreased  the  value  of  the  world's  savings  by  one  third  in  15  years" 
and  advanced  the  rate  of  interest.  So  the  rate  of  interest  advances 
because  of  the  greater  supply  of  money!  It  is  to  be  hoped  in  the 
interest  of  intending  investors  that  the  editor  is  more  lucky  in  his 
investment  advice  than  in  his  guesses  at  economics. 

'  David  A.  Wells  says  that  prices  and  rents  rose  90%,  but  wages 
only  60%  between  1861  and  1866  (in  spite  of  war  and  slight  female 
and  child  labor  competition). 

In  the  period  from  1907  to  1912,  retail  prices  of  food,  as  measured 
by  index  numbers,  increased  from  125.9  to  154.2  or  22.5%  while 
weekly  wages,  similarly  measured,  increased  from  123  to  131. 6  or 
o'lly  7%.  resulting  in  a  decline  of  the  purchasing  power  of  weekly 
wages  of  12.7%  (I-  M.  Ruliinow,  "The  Recent  Trend  of  Real  Wages," 
/Imerican  Economic  Review,  Dec,  1914,  p.  812). 


Money  Tokens  107 

may  confidently  expect  to  see  the  value  of  money  and 
"savings"  greatly  enhanced  and  commodity  prices 
reduced.  The  suggestion  seems  perfectly  simple. 
Prohatum  est! 

But  stop!  What  really  would  be  the  measure  of 
value  while  such  an  exclusive  gold  system,  with 
limited  coinage,  lasted?  There  would  be  none, — • 
gold  no  more  than  the  previously  discussed  paper 
tokens,  except  that  gold  coin  can  only  be  overvalued, 
never  depreciated  below  the  bullion  value. 

It  follows  then  that  nothing  can  perform  the 
function  of  money  but  a  material  circulating  on  the 
basis  of  its  own  value,  supplemented  within  certain 
limits  by  tokens  symbolizing  that  valuable  material, 
which  can  be  no  other  than  gold. 

c.     Silver  tokens. 

From  the  beginning  of  the  capitalist  era,  which  may 
be  allowed  to  coincide  with  the  "modern  period"  of 
the  school  histories,  the  ratio  of  value,  weight  for 
weight,  of  silver  to  gold,  up  to  1873,  fluctuated  around 
14-16  to  I,  the  highest  ratio  during  that  period  being 
14.14  in  1760  and  the  lowest  16.25  in  1813.'  Then 
began  a  gradual  decline  of  the  relative  value  of  silver 
until  it  reached  a  ratio  of  26//^  to  i  or  38^  d.  per 
ounce  in  1893.'  At  this  point  the  British  Govern- 
ment closed  the  India  mint  to  free  coinage,  apparently 
without  the  world  having  an  inkling  of  the  intended 
coup,  for  the  market  price  of  silver  dropped  so  to  say 
overnight  to  30  d.  The  government  succeeded  after 
five  years  of  suspension  of  rupee  coinage  in  raising 

'  Report  of  Director  of  the  Mint,  1914,  p.  213. 


io8  Capital  To-Day 

the  exchange  to  the  intended  rate  of  i6  d.  per  rupee, 
at  a  time  (September,  1897)  when  its  metal  value  was 
little  more  than  half  of  its  artificial  value  of  43  d.  per 
ounce,  silver  having  reached  then  the  low  quotation 
of  23f^d.  It  has  already  been  noted  in  Chapter  III. 
that  the  per  capita  circulation  of  India  is  a  mere 
pittance:  any  influence  of  the  present  rupee  circula- 
tion on  world  finance  may  therefore  be  dismissed 
from  the  mind  as  non-existent. 

The  lowest  price  reached  by  silver  was  in  1902  and 
1903,  when  it  touched  21  ^  d.,'  being  a  ratio  of 
about  47  to  I .  During  the  recent  advance  of  com- 
modity prices  in  general,  silver  about  kept  step  with 
copper  and  is  fluctuating  (July,  1 9 1 4)  around  24^^  d.  or 
a  ratio  of  42  ounces  silver  to  i  ounce  gold  worth 
$20  % .  The  fall  in  the  price  of  silver  had  not  the  effect 
of  curtailing  its  production,  which  through  all  its  vi- 
cissitudes, from  the  time  of  the  closing  of  the  India 
mint  until  1906,  remained  practically  stationary  at 
about  165  million  ounces  yearly,  and  from  that  year 
until  191 1  even  gradually  increased  to  the  materially 
higher  quantity  of  226  million  ounces  in  the  latter 
year.^"  the  larger  part  as  a  by-product  in  mining 
other  metals.  No  silver  mines  are  working  in  the 
United  States. 

Of  this  production  nearly  128  milHon  ounces  were 
exported  to  China  and  to  India  where  this  silver  is 
used  for  coinage  or  made  into  ornaments,  in  either 
case  ceasing  to  be  a  factor  in  the  world's  economy.^ 

'Report  of  the  Director  of  the  Mint,  1914,  p.  212. 

'  Ibidem,  p.  267. 

J  According  Lo  the  report  of  the  Bureau  of  the  Mint  the  exports 


Money  Tokens  109 

The  balance  remained  in  countries  more  advanced 
in  capitalist  economy.'^ 

Thus  silver,  so  far  as  it  affects  the  economics  of 
the  capitalist  countries,  has  fallen  to  the  low  estate  of 
a  modest  commodity  of  very  moderate  total  value 
produced  annually.  Now  what  about  the  impor- 
tance of  the  already  existing  silver  stocks? 

Every  country  has  a  circulation  of  silver  as 
required  in  the  small  transactions  of  daily  life  for 
which  gold  or  paper,  for  obvious  reasons,  are  ill 
adapted.  In  the  last  week  of  1893,  the  year  of  the 
abolition  of  free  coinage  in  India,  the  Bank  of  France 
held   silver  of  the  nominal    value  of   1261   million 


of  silver  from  London  and  the  United  States  to  India,  Hongkong, 
and  China  amounted  in  1912  to  127,891,032  ounces.  "The  silver 
coinage  of  the  India  mints,  which  included  British  dollars  for  Hong- 
kong banks,  reqmred  46,971,959  ounces,  and  the  coinage  of  China, 
as  reported  to  the  bureau,  required  52,077,305  fine  ounces,  or  to- 
gether 99,049,264  ounces.  The  remainder,  28,841,768,  plus  existing 
stocks  at  the  beginning  of  the  year,  was  available  for  industrial  con- 
sumption."— Report  of  the  Director  of  the  Mint,  1913,  p.  258. 

'  The  quantity  used  by  non-Asiatic  countries  for  coinage  and  in 
the  arts  respectively  is  not  given  in  the  report,  but  can  be  calculated 
as  follows:  The  total  amount  used  for  coinage  throughout  the  world 
is  estimated  by  the  Director  of  the  Mint  {ibidem,  p.  259)  at  142 
million  ounces,  deducting  from  this  99  million  ounces  used  for  coin- 
age by  Asia  (see  preceding  footnote),  leaves  a  balance  for  coinage  for 
countries  outside  of  Asia  of  43  million  ounces.  The  total  industrial 
consumption  is  given  at  99  million  ounces  {id.,  p.  259) ;  deducting  from 
this  29  million  ounces  used  by  Asia  for  the  same  purposes  (preceding 
footnote),  leaves  a  balance  for  the  rest  of  the  world  of  70  million. 

It  will  be  observed  that  the  total  world  consumption  of  silver  for 
all  purposes  thus  amounts  to  about  241  million  ounces,  or  about  15 
million  ounces  in  excess  of  the  world  production.  The  difference  is 
made  up  partly  of  stocks  carried  from  the  previous  year  and  partly 
of  melted  old  metal. 


no  Capital  To-Day 

francs.'  Since  then  (up  to  July  30,  1914)  the  Bank 
has  managed  to  get  rid  of  610  milHons''  in  the  colonies 
and  in  the  Congo.  ^  The  balance  may  be  redeemed 
by  the  other  members  of  the  Latin  Union. 

It  is  only  in  the  United  States  that  a  large  stock 
of  silver  exists  which  nobody  seems  concerned  to 
reduce.  It  circulates  in  the  form  of  silver  certif- 
icates, standard  silver  dollars,  and  subsidiary  coin 
which  together  amounted  to  748  million  dollars 
December  31,  1913.'' 

We  happen,  alone  among  nations,  to  be  loaded 
with  a  heavy  stock  of  a  commodity  which  was  being 
forsaken  as  money  material  by  one  nation  after  the 
other,  prior  to  its  great  degradation,  and  the  price 
of  which  had  been  tending  continually  downward. 
Briefly,  this  is  the  story  of  the  origin  of  this 
stock : 

Momentary  political  exigencies  of  the  Republican 
politicians  (notwithstanding  the  natural  mission  of 
their  party  as  the  capitahst,  therefore  gold,  party) 
resulted  in  the  Bland- Allison  compromise  bill, 
enacted  February  28,  1878,  over  President  Hayes's 
veto.  This  act  directed  the  monthly  purchase  at 
market  prices  of  not  less  than  two  million  dollars' 
worth  of  silver  to  be  coined  into  dollars,  which  were 

'  Report  of  National  Monetary  Commission  on  the  Bank  of  France, 
1910,  p.  16. 

'  New  York  Times  Annalist,  December  21,  19 14,  p.  486. 

J  Previous  to  the  exposure  of  the  Congo  horrors,  the  natives  were 
paid  in  rice  and  salt,  that  is  they  were  given  something  to  cat.  The 
great  majority  of  the  population  had  diod  before  the  murders  by  King 
Leopold  II.  of  Belgium  and  Ills  confederates  were  stopped. 

4  Annual  Report  of  the  Director  of  the  Mint,  1914,  p.  205. 


Money  Tokens  iii 

to  be  legal  tender.'  Under  the  operation  of  the 
act  until  1890  the  purchases  aggregated  291  million 
ounces  at  an  average  price  of  about  $1.06  and  re- 
sulted in  the  coining  of  378  million  dollars.^ 

During  this  period  the  price  of  silver  continued  to 
fall,  and  in  the  latter  year  the  Republican  politi- 
cians became  afraid  of  losing  the  States  controlled  by 
the  silver  mine  owners,  unless  they  did  something 
for  the  latter.  On  July  14  the  Sherman  act  was  passed, 
ordering  the  monthly  purchase  of  41^  million  ounces 
and  the  issue  of  silver  certificates  as  legal  tender, 
against  the  stock  of  metal.  ^  Under  this  act  there 
were  bought  169  million  ounces  at  an  average  price 
of  92 ><  cents. 

Owing  to  the  return  of  securities  by  foreign  holders, 
as  already  mentioned  in  the  preceding  chapter,  and 
to  the  government's  monthly  investment  in  silver, 
the  gold  reserve  against  the  greenbacks,  already 
referred  to,  threatened  to  disappear  entirely  in  1893, 
the  year  of  a  severe  panic  in  the  United  States  and 
also  of  the  closing  of  the  India  mint,  and  the  Sherman 
act  was  repealed  November  i,  1893. 

In  1898  the  stock  was  ordered  coined,  including 
the  seigniorage  amounting  to  about  62  million  dol- 
lars. This  seigniorage  consisted  of  the  difference 
between  the  prices  paid  for  the  silver  and  the  number 


'  Laws  Concerning  Money,  Banking,  and  Loans,  Sen.  Doc. 
No.  580,  6ist  Cong.,  2d  Session,  1910.  Law  of  February  28,  1878, 
sec.  I,  p.  579. 

»  Annual  Report  of  the  Director  of  the  Mint,  1914,  p.  89. 

3  Laws  concerning  Money,  Banking,  and  Loans,  Sen.  Doc.  No.  580, 
6ist  Cong.,  2d  Session,  1910.     Act  of  July  14,  1890,  pp.  589,  590. 


112  Capital  To-Day 

of  overvalued  dollars  which  could  be  coined  from  it. 
These  dollars  of  41 2>^  grains,  900  fine,  equivalent 
to  37i>4  grains,  1000  fine,  are  worth  at  this  writing 
(July,  1914),  on  the  basis  of  the  New  York  quotation 
of  52 >^  cents  per  fine  ounce,  40  cents  each. 

The  people  can  now  make  an  estimate  of  how  much 
their  pecuHar  institution,  the  poUticians,  has  cost 
them  in  relation  to  silver.  They  bought  altogether 
over  500  million  ounces  at  the  average  price  of 
$i.oi>^,  now  down  to  523^  cents.  But  there  is  no 
doubt  that  any  attempt  by  the  government  to  sell 
this  stock  of  merchandise,  in  competition  with  the 
producers  of  silver,  would  result  in  a  further  decHne 
of  the  market  price. 

The  present  nominal  commercial  value  of  our 
standard  dollars,  578  million  pieces,'  is  about  231 
milHon  dollars.  As  they  constitute  by  far  the  great- 
est and  the  only  stationary  stock  of  silver  in  the 
world,  it  is  at  once  evident  that  the  white  metal 
has  fallen  to  unimportance  as  a  constituent  of  the 
world's  monetary  system.  An  understanding  of  the 
present  day  silver  situation  can  only  find  an  appli- 
cation in  connection  with  the  already  mooted  ques- 
tion of  the  gold  supply  and  the  by  no  means  remote 
contingency  of  a  gold  famine. 

The  propositions,  advanced  by  various  people, 
which  might  be  considered  before  long  by  the  gov- 
ernments, embrace  the  following: 

Would  the  estabHshment  of  bi-metalhsm  by  agree- 
ment of  all  nations  be  practicable  and  offer  a  solu- 
tion, considering 

'  Report  of  Director  of  the  Mint,  19 14,  p.  89. 


Money  Tokens  113 

(a)  The  difficulty  of  maintaining  a  permanent  ratio 
in  spite  of  all  contingencies; 

(b)  The  difficulty  of  preventing  the  accumulation 
of  one  metal  only  as  reserves  and  hoards  which  may 
result  from  a  tendency  to  a  relatively  more  abundant 
production  of  the  other  metal,  and  the  consequent 
danger  of  the  breaking  up  of  the  international 
agreement ; 

(c)  The  unimportance  of  the  now  existing  stock  of 
silver  as  a  prompt  addition  to  the  supply  of  money 
and  as  a  basis  for  a  ratio; 

(d)  That  a  large  demand  for  coinage  would  raise 
the  market  price  of  silver,  stimulating  production  to 
an  unknown  extent,  as  the  price  continues  to  rise, 
and  rendering  an  arbitrary  ratio  a  matter  of  great 
difficulty ; 

(e)  The  possibility  of  an  international  mint  for  the 
limited  coinage  of  silver,  with  branches  in  each 
country,  and  the  abolition  of  national  monetary 
systems ; 

(f)  The  possibility  of  an  international  bank; 

(g)  The  time  at  the  disposal  of  the  governments, 
considering  the  urgency  of  the  gold  situation,  for 
carrying  into  effect  one  or  the  other  of  these  more  or 
less  chimerical  measures  of  salvation. 


CHAPTER  VI 

MONEY  OF  ACCOUNT 

Within  the  memory  of  many  a  man,  that  is 
looking  back  fifty  years,  there  has  arisen  in  this 
country  a  system  of  money  of  account  which  has 
largely  supplanted  or  added  itself  to  the  use  of 
gold  and  token  money  as  means  of  purchase  and  of 
deferred  payment.  This  money  of  account  consists 
of  deposits  in  the  banks  to  the  credit  of  the  capitalists, 
who  make  transfers  to  one  another  on  the  books  of  the 
banks  by  means  of  written  orders  called  checks. 

The  total  of  these  individual  deposits 
(so  called  technically)  amounted  on  June 

4,  1913,  to $17,936,000,000* 

to  which  we  add  as  similar  in  origin  and 
economic  function  the  surplus  and  undi- 
vided profits  of  the  banks 2,287,000,000* 

and  as  equally  logical  that  part  of  the 
capitalization  of  the  banks  which  hadnot 
been  paid  in,  but  consists  of  profit,  as  for 
instance  in  the  case  of  the  First  National 
Bank  of  New  York,  whose  original  capital 
of  $500,000  was  increased  in    1901   to 

'  Report  of  Comptroller  of  the  Currency,  1913,  p.  45- 
'  Ibidem,  p.  46. 

114 


Money  of  Account  115 

$10,000,000  by  the  distribution  of  a 
stock  dividend  of  1900%;  but  as  no 
record  of  capitalization  from  profits  is 
available,  we  will  merely  add  the  differ- 
ence between  the  alleged  total  capital 

of  the  banks $2,1 62,000,000' 

and  the  amount  of  their 

reserves 1,561,000,000^         601,000,000 

Total  money  of  account  in  1913 $20,824,000,000 

Against  individual  deposits  in  1863^  .  .  .       394,000,000 

In  these  same  years  the  total  current 
money  in  the  country  is  reported  as  fol- 
lows'':   in  1913 $3,720,000,000 

in  1863 675,000,000 

It  is  seen  that  while  current  money  has  increased 
at  the  rate  of  I  to  5,  money  of  account  has  increased 
as  I  to  53. 

In  what  manner  has  this  money  of  account  origi- 
nated and  what  is  its  true  inwardness? 

Anybody  unfamiliar  with  the  history  of  banking 
may  be  pardoned  for  supposing,  in  comparing  the 
figures  of  the  deposits  in  1863  and  191 3,  that  the 
beginnings  of  the  banks  of  deposit  coincided  with 
the  rise  of  capitalism  about  the  middle  of  last  century. 
Such,  however,  is  not  the  case.  Banks,  conducted 
with  the  technique  of  the  present  day,  existed  already 
in  precapitalist  times,  even  in  antiquity. 

The  banks  of  ancient  Greece  and  Rome  were 
primarily  dealers  in  bullion  and  foreign  coins.     This 

'Reportof  Comptroller  of  the  Currency,  1913,  p.  46-      'M,p.43- 

3  There  were  no  accumulated  bank  profits. 

*  Report  of  Secretary  of  the  Treasury,  1913,  Table  J. 


ii6  Capital  To-Day 

business  was  a  natural  outgrowth  of  international 
trade  and  a  technical  necessity  for  the  merchants 
traveling  to  strange  lands  for  the  purchase  of  goods, 
whither  they  carried  gold  and  silver  in  bulHon  and 
in  their  home  coins.  The  banks  not  only  issued  bills 
of  exchange  on  their  confreres  in  other  cities  and 
countries,  but  they  also  received  deposits  either  on 
time  against  certificates  of  deposit,  or  subject  to 
checks,  paying  interest  on  deposits  or  not  according 
to  circumstances,  and  lending  the  money  to  others 
at  generally  high  rates  of  interest. '  The  depositors' 
money  as  well  as  their  own  was  used  by  these  ancient 
banks  as  an  instrument  of  exploitation  of  the  masses, 
the  agricultural  workers,  similar  to  the  exploitation 
in  recent  centuries  of  the  Indian  ryot  by  the  money 
lenders.  Indeed,  the  relations  of  creditors  and 
debtors  constituted  the  issue  in  the  class  struggles  of 
Greece  and  Rome,  and  as  debts  were  secured  not 
only  by  mortgage  on  the  lard,  but  by  bond  on  the 
body  of  the  debtor,  much  of  the  chattel  slavery  of 
antiquity  owed  its  existence  to  this  source.  The 
power  of  the  state  was  vested  in  the  plutocracy.  In 
Athens,  at  the  time  of  the  enactment  of  a  new  bank- 
ruptcy law  by  Solon,  594  B.C.,  abohshing  security 
by  the  body,  the  yeomanry  had  largely  sunk  into 
debt.  Caesar's  adoption  of  Solon's  law,  500  years 
later,  came  too  late  to  save  Rome. 

Upon  the  reawakening  of  civilization  toward  the 

'  "This  traffic  with  the  money  of  others  constituted  the  principal 
part  of  the  business  of  the  money  changers,  although  they  soniclimes 
employed  their  own  money  also  in  the  same  way."  A.  Bocckh, 
Public  Economy  of  the  Athenians,  p.  176. 


Money  of  Account  117 

end  of  the  Middle  Ages,  banks  reappear  in  the  cities 
of  Northern  Italy,  especially  in  Venice  and  in  Flor- 
ence, the  latter  then  a  great  silk  and  woolen  weav- 
ing center.  Among  the  scores  of  bankers  in  Florence 
some  attained  to  immense  wealth,  as  the  Medici,  the 
Peruzzi,  and  the  Bardi,  the  last  Bardo  being  the 
object  of  George  Eliot's  sympathetic  study  in 
Romola.  A  general  statement  of  the  assets  and  lia- 
bilities of  the  Bardi  and  the  Peruzzi  at  the  time  of 
their  failures  shows  that  their  loans  to  kings  far 
exceeded  the  amounts  due  their  depositors. 

From  the  foregoing  brief  recital  of  the  principal 
facts  of  earlier  banking  history  it  appears  that,  not- 
withstanding the  similarity  of  methods  with  those 
of  modern  banking,  it  differed  from  the  latter  in  that 
its  main  object  was  not,  so  far  as  the  use  to  which 
the  deposits  were  put,  to  aid  industry  and  commerce. 
Modern  banking  represents  money  capital  originally 
derived  from  the  industrial  productive  (and  mer- 
cantile) capitalists  which  has  become  specialized 
as  a  distinctive  form  of  capital,  having  its  own  par- 
ticular function  in  the  capitalist  system  of  society, 
equally  with  the  two  other  divisions  of  the  social 
capital,  the  productive  and  the  mercantile. 

The  rudiments  of  banking  by  the  capitalist 
class  for  its  own  purposes  are  to  be  found  in  the 
clearing  association  of  the  merchants  of  Venice  and 
in  the  business  of  the  private  "Kassiers"  of  the 
Dutch  commercial  cities.  In  both  cases  the  aim 
was  of  purely  technical  advantages,  the  initial  act 
having  been  the  deposit  of  a  certain  sum  of  money 
by  the  member  or  client  for  safe-keeping,  and  avail- 


ii8  Capital  To-Day 

able  for  transfer  to  the  accounts  of  other  members  or 
cHents  on  written  orders.  These  agencies  were  the 
social  bookkeepers  and  cashiers  within  their  narrow 
circumscriptions.  With  the  extension  of  this  social 
function  over  a  wider  field  and  the  addition  of  trad- 
ing in  credits  for  their  own  account,  modern  bank- 
ing was  complete. 

So  long  as  the  banks  (the  "Kassiers' "  original  and 
principal  business  was  dealing  in  foreign  coin  and 
bullion)  or  bank-like  institutions  acted  merely  in  a 
clerical  capacity,  the  category  of  money  of  account 
could  not  arise;  they  were  not  supposed  to  make 
any  transfers  on  their  books  without  having  the 
actual  cash  in  their  strong  boxes.  It  was  only  when 
increasing  wealth  made  credits  possible  and  safe,  both 
as  regards  bankers  and  borrowers,  and  the  use  of  the 
idle  deposits  as  loan  capital  by  and  for  the  account 
and  risk  of  the  bankers  became  the  practice,  that 
the  conditions  were  given  for  the  creation  of  the 
new  money  of  account  and  the  concentration  and 
specialization  of  money  capital  for  a  separate  and 
distinct  social  function. 

The  manner  in  which  the  present  great  amount 
of  money  of  account,  non-existent  at  the  inception 
of  modern  banking,  has  been  built  up  can  be  seen 
by  observing  what  is  going  on  continually  in  our  own 
time,  just  as  other  sciences  interpret  by  observation 
of  present  processes  the  great  changes  wrought  in  the 
past,  when  their  records  are  not  self-explanatory. 

Observe  what  becomes  of  the  deposit  made  by  the 
retail  merchant  of  the  currency  taken  in  by  him  dur- 
ing the  day.     Being  a  thrifty  man,  who  looks  out 


Money  of  Account  119 

for  all  there  is  in  the  cash  discount,  he  at  once  mails 
a  check  against  this  deposit  to  his  wholesale  purveyor, 
let  us  assume  for  the  cost  of  precisely  the  goods  sold 
that  day  by  the  said  retail  merchant.  The  amount 
of  the  check  will  be  less  than  the  deposit,  because 
the  retailer  retains  his  share  of  the  surplus  value 
produced  by  the  workers,  his  share  being  fixed  by 
certain  economic  laws  laid  bare  by  Marx,  to  which  we 
shall  revert  later.  The  wholesale  merchant,  in  his 
turn,  against  the  money  so  obtained,  gives  a  check 
to  the  productive  capitalist  which  likewise  leaves 
behind  on  the  wholesaler's  bank  account  a  sediment, 
representing  his  share  of  the  surplus  value.  The 
productive  capitalist  now  draws  against  the  deposit 
of  the  merchant's  check  as  much  currency  as  may 
be  needed  in  the  process  of  reproduction  for  the  pay- 
ment of  the  wages  to  the  workers,  whereupon  the 
latter  are  ready  to  start  at  the  retail  counter  the 
second  rotation  of  the  currency.  The  same  thing 
occurs  daily  not  only  with  the  revenue  of  the  workers, 
but  partly  also  with  that  portion  of  the  revenue  of  the 
capitalists  which  the  latter  use  for  their  individual 
consumption. 

This  rotation  of  the  currency  in  which  the  banks 
are  a  channel  of  passage  is  repeated  every  day  and 
as  often  increases  the  sediment  on  each  capitalist's 
account  until  the  accumulation  of  these  sediments, 
which  are  plainly  nothing  but  profits,  suffices  for 
the  settlement  between  the  capitalists  of  their  mu- 
tual obligations  by  simple  transfers  on  the  books 
of  the  banks.  In  proportion  as  the  settlements 
by  mere  transfers  on  written  orders  or  checks  in- 


120  Capital  To-Day 

crease,  the  relative  importance  of  current  money  as 
a  constituent  of  the  daily  deposits  decreases.  The 
latter  consist  now  in  the  United  States,  as  they  have 
done  since  many  years,  of  about  94%  checks  and 
about  6%  current  money.  The  deposits  of  money 
of  one  day  are  generally  drawn  from  the  banks  on  the 
next  day,  in  the  interim  counting  as  bank  reserves. 
Gold  isvery  largely,  and  standard  silver  dollars  almost 
entirely,  withheld  by  the  banks  from  circulation. 
Currency  continues  in  the  main  to  be  needed  only 
for  the  country's  weekly  or  fortnightly  payroll  and 
for  part  of  the  individual  consumption  of  the  capital- 
ists, the  other  part  being  paid  by  them  in  checks. 

If  the  profits  of  the  individual  capitalists  con- 
stantly accumulated  as  current  money  in  the  banks 
and  were  kept  intact  by  the  latter,  except  as  with- 
drawn by  the  selfsame  capitalists,  it  is  evident  that 
after  a  time  the  greater  part  of  a  country's  stock  of 
money  would  be  virtuahy  locked  up  as  hoards  in  bank 
vaults  and  that  an  extreme  scarcity  of  the  medium 
of  circulation  would  ensue.  But  then  the  banks 
would  not  be  banks,  but  mere  custodians  and  dis- 
bursers  of  the  money  of  their  clients.  The  revenue 
of  the  banks,  however,  is  not  derived  from  any  pay- 
ment for  the  services  of  storage  and  handling  of 
money,  but  from  interest  on  loans  made  with  their 
depositors'  money.  This  constitutes  essentially  the 
business  of  a  bank.  But  the  current  money  deposited 
in  the  banks  on  one  day  is  used  freely  by  them  the 
next  day  to  pay  any  applying  depositor,  and  thus 
the  money  reenters  regularly  the  general  circulation 
(except  for  a  certain  reserve  fund) .     In  fact  the  loans 


Money  of  Account  121 

made  by  banks  no  longer  consist  of  current  money 
but  of  titles  to  money.  They  transfer  to  borrowers 
the  titles  to  money  vested  in  the  depositors,  without, 
however,  any  cancellation  of  the  depositors'  titles,  nor 
with  their  legal  consent.  In  other  words  the  banks 
transmute  the  profit  accumulations  of  the  industrial 
capitalists,  which  are  for  these  in  money  form,  into 
debts  owing  them  by  the  banks.  On  the  other  hand 
the  banks,  in  their  name  and  for  their  own  account 
and  risk,  become  creditors  of  their  borrowers.  The 
banks'  debts,  known  as  bank  deposits,  function  as 
money  in  a  somewhat  similar  manner  to  the  gov- 
ernment's non-interest-paying  debt,  its  notes,  the 
difference  being  that  the  former  are  private,  the 
latter  social  debts. 

Now  how  can  the  banks  respond  to  the  normally 
large  demands  for  money  by  their  depositors  who 
never  formally  consented  to  the  diversion  of  their 
funds,  which  are  in  fact  supposed  to  be  ever  at  their 
disposal  ? 

It  operates  in  this  manner:  depositor  A  draws  a 
check  on  bank  Y  for  $100,  depositor  B  on  bank 
Z  for  $90.  A's  check  in  the  usual  course  is  deposited 
by  the  payee  in  Z,  B's  check  by  the  other  payee  in  Y. 
The  two  banks  exchange  the  checks  they  hold  against 
each  other,  Y  paying  to  Z  the  difference  of  $10. 
Collectively  the  two  banks  have  liquidated  two 
debts  aggregating  $190  without  having  paid  out  a 
cent.  This  is  not  necromancy;  the  performance  was 
made  possible  because  two  new  depositors  or  creditors 
for  the  identical  amounts  took  the  places  of  the 
former  ones.     But  what  if  depositors  were  to  call 


122  Capital  To-Day 

extensively  or  universally  for  actual  repayment  to 
themselves,  that  is,  without  furnishing  substitute 
creditors?  That  would  be  quite  a  different  case 
about  which  we  shall  have  more  to  say  later. 

Money  of  account,  then,  as  represented  in  bank 
deposits  and  in  the  bank's  own  surplus,  is  that  part 
of  the  capitalists'  revenue  which  has  for  the  time 
being  not  been  realized  in  money,  but  only  in  a  title 
primarily  to  money  and  secondarily  to  value  in 
general. 

Let  us  clearly  understand  this  point. 

The  total  annual  product  of  labor,  beyond  the 
reproduction  of  old  value,  is  a  certain  exact  quantity 
of  which  one  portion  serves  in  the  form  of  wages  to 
reconstitute  and  perpetuate  labor  power,  while  the 
other  portion  constitutes  the  revenue  of  the  capi- 
talists and  landowners.  No  other  value  has  been 
created. 

This  product  of  labor  appears  as  a  mass  of  com- 
modities, including  the  money  commodity — gold. 
Money  of  account  is  not  a  product  of  labor,  therefore 
not  of  intrinsic  value  itself,  any  more  than  token 
money.  Both  are  mere  titles  to  value.  They 
differ  in  this,  that  while  the  token  has  the  form  of  a 
social  debt  to  the  individual  holder  and  is  therefore 
a  legal  tender  in  discharge  of  private  obligations, 
money  of  account  has  the  form  of  a  debt  owing  to 
individual  depositors  by  private  institutions  and  is 
therefore  not  a  legal  tender.  Not  being  value,  the 
sum  of  money  of  account  added  during  the  year  can- 
not be  something  produced  in  addition  to  or  aside 
from  the  year's  product  value.     It  is  a  record  kept 


Money  of  Account  123 

by  the  banks,  as  social  bookkeepers,  of  part  of  the 
value  newly  created,  namely  of  that  part  of  the 
surplus  value,  appropriated  by  the  capitahst  class, 
which  exists  at  any  time  in  money  form.  It  is  also 
a  record  of  the  constantly  changing  share  of  each 
capitalist  in  the  total  surplus  value  or  his  individual 
profit  in  money  form. 

The  sum  added  annually  to  the  previously  existing 
money  of  account  represents  profits.  But  while  the 
former  is  an  intangible  creation  of  the  mind,  mere 
bookkeeping,  the  thing  it  represents  is  concrete  and 
very  definite.  So  are  the  annual  profit  additions 
to  the  capital  account  on  the  ledger  of  an  industrial 
concern,  which  profit  additions  appear  there  in  terms 
of  dollars,  purely  creations  of  the  mind,  but  the 
profits,  as  seen  in  additional  buildings,  machinery, 
raw  materials,  etc.,  are  none  the  less  real  for  not 
consisting  of  actual  dollars.  Profit  is  that  part  of  the 
new  product  value  for  which  the  workers  received  no 
equivalent  from  the  capitalists.  The  surplus  product, 
for  which  the  latter  did  not  pay,  is  integrally  united 
with,  and  indistinguishable  from,  the  part  of  the 
product  for  which  they  did  or  will  pay.  But  it  is 
only  the  element  of  unpaid  surplus  product,  metamor- 
phosed by  its  sale  into  the  money  form  of  its  value, 
which  can  give  rise  to  the  formation  of  additional 
money  of  account.  That  part  of  the  proceeds  of  the 
sale  which  represents  merely  preserved  value  and 
wages,  in  other  words  the  money  capital  advanced 
for  production,  is  merely  restored,  and  the  money 
returns  to  its  point  of  departure.  In  having  made 
the  sale  the  capitalists  have  effected  the  first  phase 


124  Capital  To-Day 

in  the  necessary  exchange  of  commodities,  the  trans- 
formation of  the  commodity  into  money.  They  now 
hold  the  money  form  of  the  commodity  value  which 
must  perforce  complete  the  second  phase  of  the  ex- 
change of  commodities,  viz.,  the  transformation  of 
money  into  commodity  by  purchase  for  the  individual 
consumption  of  the  capitalists  or  of  means  of  pro- 
duction. The  second  phase  is  forced,  because 
continuous  selling  without  buying — that  is,  the  con- 
tinuous movement  of  commodities  in  one  direc- 
tion with  a  continuous  movement  of  money  in  the 
opposite  direction — is  an  absurdity.  Commodities 
must  be  exchanged  with  each  other,  and  this  is  only 
possible  through  selling  and  buying  with  money. 
All  mone}''  of  account  is  destined  to  complete  this 
exchange  which  at  any  given  moment  it  has  left  only 
half  performed. 

True,  some  industrial  concerns  abstain  from  actu- 
ally transforming  all  their  money  into  commodities. 
They  withdraw  part  of  it  from  its  circulation  as 
industrial  capital  and  divert  it  to  the  sphere  of 
land-ownership  and  of  fictitious  capital,  the  latter 
consisting  mainly  of  shares,  bonds,  and  real  estate 
mortgages.  Land  prices  and  fictitious  capital  are 
subjects  the  more  lengthy  discussion  of  which  we  have 
to  defer  to  another  chapter.  In  connection  with  our 
immediate  subject  it  is  only  necessary  to  state  that  a 
conversion  of  industrial  capital  into  land-ownership 
or  fictitious  capital  amounts  to  a  transfer  of  money, 
therefore  of  title  to  commodities,  to  the  sellers  of  land 
or  fictitious  capital  who  now  become  the  buyers  of 
those   commodities   in   the   place   of  the   industrial 


Money  of  Account  125 

capitalists.  The  purchase  of  commodities  must 
always  be  the  outcome.  Useful  labor  and  the  con- 
sumption of  the  products  is  the  economic  alpha 
and  omega  of  any  form  of  society,  no  matter  into  what 
intricate  forms  those  simple  objects  may  be  clothed. 
If  the  sellers  of  land  and  securities,  or  others  in  their 
places,  refuse  to  consume,  production  will  be  reduced 
correspondingly. 

If  it  is  clear,  then,  on  the  one  hand,  that  profit  is  a 
concrete  thing,  the  surplus  product  of  the  workers 
which  is  appropriated  by  the  capitalists,  and  if,  on  the 
other  hand,  money  of  account  is  the  money  form  of 
part  of  that  profit  and  yet  not  value,  what  has 
become  of  the  concrete  substance,  the  product  of 
labor? 

The  productive  capitalists,  who  were  the  owners 
of  the  surplus  product,  have  parted  with  it  by  sale 
and  accepted  from  the  buyers  their  checks  in  pay- 
ment. The  latter  may  have  consumed  the  great  bulk 
of  the  goods,  while  the  sellers  have  become  the 
possessors  of  an  accumulation  of  checks.  These  are 
transferred  from  one  to  the  other  as  money,  but  there 
is  no  recourse  in  case  of  non-payment  against  the 
original  creators  of  this  money  of  account,  those  who 
consumed  the  goods.  Whether  these  checks  will 
prove  to  be  good  in  the  end  or  whether  they  will 
eventually  be  rubber-stamped  "No  Funds"  is 
another  question  which  we  shall  have  to  consider 
later. 

In  view  of  the  fact  that  the  goods,  by  the  sale  of 
which  the  money  of  account  has  been  built  up,  have 
partly  (at  the  point  where  we  have  now  arrived  to  a 


126  Capital  To-Day 

still  unkno"WTi  extent)  been  consumed,  it  follows  that 
the  steady  increase  in  the  volume  of  money  of 
account  is  by  no  means  reflected  in  a  corresponding 
increase  in  the  value  of  the  stock  of  commodities 
which  are  to  satisfy  the  money  titles.  The  extreme 
example  of  the  consequences  of  a  great  war  will 
serve  best  to  make  the  point  clear. 

A  war  may  cost  daily  a  number  of  millions  as  the 
regular  money  expense  of  the  armies  concerned.  It 
is  spoken  of  as  a  loss  of  money.  In  reality  there  is  no 
destruction  of  money.  The  governments  pay  it  over 
to  the  purveyors  of  supplies  w^ho  in  their  turn  circu- 
late it  further  in  the  usual  course.  What  has  taken 
place  is  the  consumption  of  commodities  without 
any  reproduction  whatever,  so  far  as  the  combatants 
are  concerned,  and  with  but  curtailed  reproduction 
by  the  civiHans  of  those  articles  which  are  ordinarily 
consumed  by  the  people  at  large,  partly  to  give  way 
to  the  increased  production  of  war  materials.  The 
effect  is  a  rise  of  prices,  first  of  the  class  of  com- 
modities which  had  been  mainly  consumed — the  ne- 
cessaries of  life.  This  coincides  with  a  temporary 
decline  of  the  prices  of  commodities  not  absolutely 
necessary,  or  which  may  be  classed  as  luxuries.  But 
eventually,  in  consequence  of  the  price  advance  of 
the  necessities,  all  other  commodities  follow  suit. 
The  latter  effect  is  of  course  conditioned  on  the 
workers  being  able  to  maintain  their  standard  of  life. 
Evidently  the  accumulated  imaginary  and  real 
money  as  the  value  form  oi  former  commodities  may 
lack  the  necessary  counterpart  of  present  com- 
modities for  its  reahzation. 


Money  of  Account  127 

Money  of  account,  therefore,  being  a  title  to  and 
representing  current  money,  is  the  money  form  of 
value  of  sold  commodities  and  held  for  the  time  being 
for  completion  of  the  exchange  against  other  com- 
modities (which  may  or  may  not  exist  at  the  time). 
After  each  act  of  circulation  it  continues  to  exist  as 
before.  It  is  indestructible,  except  either  by  the 
theoretically  normal  process  of  conversion  into  cur- 
rent money,  which,  as  we  shall  presently  find,  is 
possible  only  to  an  exceedingly  small  extent;  or  by 
the  theoretically  abnormal  process  of  the  failure  of 
banks  of  deposit.  Therefore,  in  the  absence  of  pri- 
vate hoarding  and  bank  failures  the  sum  of  money 
of  account  always  goes  on  increasing;  it  never 
decreases. 

But  just  what  is  the  mechanism  of  increase?  If  C 
receives  a  check  from  D  which  realizes  for  C  the 
money  form  of  newly  created  value,  namely  his 
profit,  that  money  is  not  newly  created  money.  It 
is  a  transfer  of  money  which  previously  existed  in 
D's  possession.  Evidently  no  amount  of  check 
payments  can  account  for  the  continual  increase 
in  deposits,  no  matter  how  much  new  value  may 
constantly  be  produced.  If  we  hold  fast  in  our  mind 
for  a  moment,  the  same  as  if  it  could  be  a  reality,  the 
absurdity  of  an  exclusive  money  of  account,  no  other 
money  whatever  existing,  we  realize  at  once  that 
the  constantly  growing  commodity  value  would  have 
to  be  circulated  by  transfers  of  money  of  account, 
the  sum  of  which  would  be  stationary — fixed  once 
and  for  all.  An  inventory  of  the  year's  accumulation 
of  the  capitalist  class  would  show  that  the  same 


128  Capital  To-Day 

consists  entirely  of  commodities;  none  of  it  would 
appear  in  money  form. 

But,  really,  we  already  have  the  answer  to  our 
problem.  We  have  observed  how  our  friend,  the 
retail  merchant,  deposited  currency  which  included 
his  profit.  If  we  follow  merely  that  part  of  it  which 
represents  profit  (the  part  which  represents  capital 
advanced  for  production  necessarily  returns  to  its 
source  for  reproduction)  we  find  that  it  presently 
passes  out  of  the  bank  as  concrete  money  to  continue 
its  perpetual  journey.  But  the  departed  concrete 
money  has  nevertheless  left  behind  its  shadow  on  the 
credit  side  of  the  retail  merchant's  deposit  account. 
The  money  has  apparently  doubled:  the  reality  ex- 
isting in  general  circulation  as  current  money,  the 
shadow  existing  in  the  bank  as  money  of  account. 
This  remarkable  independence  of  the  shadow  from 
the  substance,  and  the  daily  repetition  of  the  wonder, 
opens  the  prospect  of  endless  increase  of  such 
shadows  produced  by  the  identical  money  substance, 
until  the  mass  of  the  latter  becomes  quite  insig- 
nificant compared  to  the  extent  of  its  own  shadows. 
The  social  belief  in  this  wonder  rests  on  the  faith 
that  all  these  shadows  can  easily  be  resubstantiated. 

In  the  world  of  reality  an  inventory  of  the  year's 
accumulation  of  the  capitaHst  class  shows  that  the 
same  consists  not  only  of  com.modities,  but  also  of 
an  addition  of  a  quantity  of  gold  or  current  money, 
supposed  to  exist,  and  to  which  money  of  account 
is  the  title. 

Money  of  account  is  a  record  of  profits  which  at 
any  given  moment  are  reahzed  in  money  form,  but 


Money  of  Account  129 

not  in  money.  It  is  only  a  nominal  realization. 
The  actual  realization  of  profits  consists  of  commod- 
ities (the  existing  stock  of  means  of  production  and 
means  of  consumption)  and  gold,  and  it  includes 
also  the  individual  consumption  of  the  capitalists 
for  which  the  identical  money  or  money  of  account 
has  served  as  means  of  purchase  over  and  over  again 
throughout  the  years.  It  would  be  incorrect  to  in- 
clude in  the  realization  of  profits  the  market  price 
of  the  land  and  securities.  There  can  be  no  con- 
crete existence  of  profit,  but  in  the  product  of  labor. 
It  is  clear,  then,  that  the  current  money  deposited 
in  the  banks  is  derived  partly  from  the  consumption 
of  the  workers,  which  part  is  withdrawn  again  from 
the  banks  in  current  money  by  the  depositors  in  order 
to  use  it  over  again  for  the  payment  of  wages.  An- 
other part  is  derived  from  those  items  in  the  indi- 
vidual consumption  of  the  depositors  for  which  they 
paid  in  current  money,  not  by  checks,  which  part  they 
will  again  withdraw  from  the  banks  in  current  money 
for  the  renewal  of  their  individual  consumption. 
All  that  part  of  the  deposits  of  current  money  which 
is  again  withdrawn  from  the  banks  by  depositors 
for  consumption,  whether  directly  for  their  own  con- 
sumption or  indirectly  (by  way  of  wages)  for  con- 
sumption by  the  workers,  canceling  such  deposits 
pro  tanto,  fails  to  increase  the  volume  of  money  of 
account.  It  is  only  that  part  of  the  profits  which 
remains  as  capital  accumulation,  and  as  such  is  lent 
by  the  banks  to  other  capitalists,  which  increases 
the  volume  of  money  of  account.  For  this  to  be  true, 
it  is  by  no  means  necessary  that  the  banks  make 
9 


130  Capital  To-Day 

loans  of  actual  current  money.  The  deposits  of  the 
latter  had  increased  the  banks'  loanable  funds  and 
the  money  reenters  circulation  in  consequence  of 
the  loans.  The  current  money  passing  out  of  the 
banks  as  a  direct  consequence  of  loans  leaves  the 
volume  of  money  of  account  entirely  unaffected,  just 
because  it  is  drawn  against  loans  and  not  against 
deposits.  Of  course,  current  money  drawn  from  the 
banks  against  loans  may  be  used  by  the  borrowers 
for  their  individual  consumption  or  in  payment  of 
wages,  but  for  the  borrowers  it  remains  the  money 
of  the  lenders,  and  only  becomes  new  money  in  the 
hands  of  the  capitalists  or  workers  who  receive  it 
for  commodities  (products  or  labor  power).  In 
short,  current  money  drawn  from  banks  by  deposi- 
tors reduces  the  volume  of  money  of  account,  but 
not  that  drawn  by  borrowers. 

Another  factor  continually  at  work  tending  to 
check  the  growth  of  the  volume  of  money  of  account, 
which  would  otherwise  proceed  much  faster  than  it 
does,  exists  in  the  constant  withdrawal  of  current 
money  from  the  banks,  now  by  one  productive 
capitalist,  now  by  another,  for  the  purpose  of  enlarg- 
ing their  scale  of  production,  principally  for  the  pay- 
ment of  additional  wages.  This  process  represents 
a  permanent  conversion  of  money  capital,  having  for 
its  owner,  as  a  deposit,  the  form  of  a  quiescent  loan 
to  the  bank,  into  active  industrial  capital  for  which 
thereafter  the  bank  is  a  mere  point  of  frequent 
passage.  Such  conversion  of  money  capital  into  in- 
dustrial capital,  or  bank  deposits  into  current  money, 
does  not  automatically   increase  the   mass   of    the 


Money  of  Account  131 

latter.  The  immediate  effect  is  that  the  existing 
mass  of  current  money  has  to  do  more  work  than 
before;  it  must  circulate  ever  faster,  until  after  a  time 
a  point  is  reached  when  the  issue  of  additional  paper 
money  imposes  itself. 

We  have  said  above  that  the  volume  of  money 
of  account  never  decreases.  This  is  practically 
the  case,  in  spite  of  the  currency  withdrawals  follow- 
ing closely  on  the  heels  of  currency  deposits.  But 
to  be  quite  precise,  some  recessions  of  deposits  having 
actually  occurred,  it  is  necessary  to  draw  attention 
to  the  fact  that  all  individual  deposits  are  not  identi- 
cal with  money  of  account.  The  deposits  include 
at  any  given  moment  a  certain  element  which  does 
not  consist  of  money  at  all,  cash  or  checks,  and  is 
in  reality  contrary  to  the  theory  of  banking,  though 
in  practice  unavoidable.  When  a  depositor  takes  up 
a  loan  at  his  bank,  the  amount  (less  the  interest)  is 
credited  to  his  regular  deposit  account.  Thus  the 
addition  to  the  bank's  loan  account  is  offset  by  what 
appears  as  an  addition  to  the  bank's  deposits.  This 
nominal  deposit  disappears  only  when  the  borrower's 
checks,  issued  against  the  loan,  reach  the  bank, 
usually  within  a  few  days.  The  extent  of  ' '  deposits  " 
of  this  kind  on  any  given  day  is  not  published, 
but  it  is  evident  that  a  contraction  of  loans,  apt 
to  occur  during  a  crisis  or  during  the  depression 
immediately  following,  may  become  a  cause  of 
recession  in  the  volume  of  deposits  without  any 
actual  (temporary)  recession  in  the  volume  of  money 
of  account  itself.  Such  recessions  occurred  during 
or  after  the  panics  of  1893  and  1907  to  the  extent 


132  Capital  To-Day 

of  H%  and  2]/2%  respectively  of  the  total  of  in- 
dividual deposits. ''  In  the  latter  panic  a  larger  crop 
of  bank  failures  than  in  normal  times,  with  lia- 
bilities of  210  million  dollars,^  added  to  contraction 
of  loans,  which  ordinarily  appear  as  deposits,  are 
amply  sufficient  to  account  for  the  recession  in  the 
total  of  the  deposits,  in  spite  of  the  accumulation  of 
cash  in  the  banks,  due  to  the  reduced  need  of  money 
in  active  circulation. 

However,  occasions  do  arise  when  the  practice 
of  crediting  loans  to  the  deposit  accounts  of  the 
borrowers  may  assume  such  great  proportions  in  a 
comparatively  very  short  time  as  to  make  it  seem  that 
a  rapid  and  wonderful  increase  of  the  existing  money 
of  account  has  taken  place.  Such  an  occasion 
presents  itself  when  there  takes  place  in  a  country 
within  a  limited  period  a  material  increase  in  its 
stock  of  current  money,  as,  for  instance,  through 
the  inflow  of  gold  from  abroad  in  consequence  of  a 
strong  swing  of  the  balance  of  international  obli- 
gations in  favor  of  such  country.  This  gold  reaches 
the  banks,  in  whose  possession  it  constitutes  an 
addition  to  their  free  and  available  cash  reserves. 
A  similar  result  ensues  when  by  legal  enactment  a 
reduction  is  authorized  in  the  percentage  of  cash 
reserves  hitherto  required  to  be  held  by  the  banks 
against  their  deposits.  The  liberated  part  of  the 
former  compulsory  reserves  now  becomes  available 
as  a  reserve  for  new  loans,  in  the  same  way  as  the 
imported  gold. 

'  See  Comptroller's  Report,  1913,  p.  44. 
'  Ibidem,  p.  73. 


Money  of  Account  133 

Now,  when  an  applicant  for  a  loan  appears  in  a 
bank,  must  the  official,  before  granting  the  loan, 
know  whether  he  has  an  actual  surplus  of  money 
of  account  to  lend  ?  By  no  means !  All  he  needs  to 
know  is  whether  the  bank  has  any  cash  in  excess  of 
the  legal  requirement,  and  if  so,  he  is  free  to  grant 
loans  against  its  surplus  reserve  in  the  same  pro- 
portion as  deposits  bear  to  legal  reserve  without 
regard  to  any  preexisting  money  of  account.  Pres- 
ently the  loan  is  credited  to  the  borrower's  deposit 
account,  and  presto !  the  bank  has  an  asset  in  the  form 
of  a  loan,  offset  by  a  liability  in  the  form  of  a  deposit, 
against  which  latter  the  former  surplus  reserve  now 
serves  as  legal  reserve.  There  will  be  ample  oppor- 
tunity to  observe  this  feat  in  the  operation  of  the 
new  Federal  Reserve  Act,  which  reduces  the  per- 
centage of  reserves  to  be  held  by  member  banks  from 
about  20%  to  about  15%  on  demand  deposits,  (on  time 
deposits  the  reserve  requirement  is  much  lower,  and 
mutual  savings  banks  carry  only  about  }i%  of  their 
deposits  in  actual  cash')-  If  then,  by  this  reduction 
of  5%  in  the  legal  reserve  requirement,  a  bank  finds 
that  it  has  a  surplus  of  $15,000  free  and  available  as 
a  reserve,  it  may  lend  $100,000.  It  is  consequently 
clear  that  any  increase  in  the  amount  of  free  money 
held  by  the  banks  may  lead  to  an  expansion  of  loans 
to  the  tune  of  six  times  the  sum  of  the  former. 

What  enables  banks  to  indulge  in  this  practice  is 
the  general  knowledge  that  the  other  banks  are 
doing   the   same   thing;    that   therefore   all   checks 

'  Seventeen  million  dollars  against  deposits  3770  million  dollars. 
See  Comptroller  of  the  Currency  Report,  19 13,  p.  65. 


134  Capital  To-Day 

drawn  against  such  loans,  meeting  at  the  clearing 
house,  are  likely  to  balance  each  other  approximately 
without  any  unusual  strain  on  any  one  bank  by  large 
demands  upon  it  for  cash  to  settle  clearing-house  bal- 
ances. If,  nevertheless,  the  single  bank  notices  that 
the  clearing-house  balances  against  it  are  growing 
heavier,  it  will  take  the  fact  as  a  sign  that  it  must 
reduce  its  loans.  But  in  any  event  the  money  paid 
into  the  clearing  house  by  one  bank  passes  on  to 
another  bank,  which  can  in  its  turn  use  it  as  legal 
reserve,  so  that  it  is  correct  to  say  that  any  surplus 
reserves  furnish  the  basis  in  the  United  States  for 
about  six  times  as  much  of  new  money. 

This  new  money  is  not  money  of  account  within 
the  definition  given  by  us  to  this  term.  It  is  a  new 
category  for  which  we  refrain  from  supplying  a  new 
name.  So  far  as  the  borrowers  are  concerned,  this 
new  category  is  indistinguishable  from  money  of 
accotmt.  But  its  distinctiveness  from  the  latter  is 
very  important,  first,  to  the  banks  who  lend  this 
bank-made  money,  and  secondly,  as  regards  its 
general  economic  effect. 

The  bank  which  makes  loans  up  to  the  amount  of 
checks  received  by  it  on  deposit,  in  other  words 
against  its  available  money  of  account,  has  the  cer- 
titude that  its  debits  at  the  clearing  house  cannot 
exceed  its  credits. 

On  the  other  hand,  the  bank  making  loans,  not  of 
money  of  account,  but  of  a  kind  of  money  which 
represents  only  its  promise  to  pay,  does  so  on  the 
general  knowledge  that  other  banks  are  engaged  in 
the  same  practice,  but  the  extent  to  which  this  may 


Money  of  Account  135 

be  the  case  at  any  particular  time  or  in  any  particular 
locality  remains  a  matter  of  surmise.  The  banks, 
making  loans  on  the  surmise  that  everything  will  go 
right  at  the  clearing  house,  instead  of  on  positive 
foreknowledge  to  that  effect,  may  find  themselves 
facing  surprises.  The  timely  reduction  of  outstand- 
ing loans  is  not  always  easy. 

The  creating  of  money,  so  purely  imaginary  as  this 
bank-made  kind,  must  aggravate  further  a  banking 
situation  already  sufficiently  delicate. 

Aside  from  this  specifically  financial  difference 
between  money  of  account  and  the  bank-created 
kind,  there  exists  between  them  a  difference  in  their 
general  economic  effects. 

Money  of  account  consists  of  the  orderly,  legiti- 
mate, and  gradual  accumulations  of  capital  in  money 
form  by  the  individual  capitalist  concerns.  Indus- 
trial development  depending  on  such  accumulation 
tends  to  remain  normal. 

On  the  other  hand  the  possibility  of  creating — deus 
ex  machma — billions  of  money,  not  representing  any 
labor  performed  previously,  but  mere  mutual  prom- 
ises to  pay,  can  have  no  other  effect  than  initiating 
a  period  of  abnormal  expansion,  speculation,  and 
extravagance. 

The  chance  of  earning  interest  on  a  sum  of  money 
of  which  only  one  sixth  is  a  reality,  while  the  other 
five  sixths  are  a  mere  figment  of  the  mind,  is  not  one 
by  which  the  lenders,  the  banks,  will  ordinarily  fail 
to  be  tempted. 

On  the  other  hand  the  sudden  abundance  of  loan- 
able money  and  the  prospect  of  a  "business  boom" 


136  Capital  To-Day 

stir  up  the  spirit  of  enterprise  in  all  those  able  to 
borrow,  with  few  conservative  exceptions.  While  it 
is  historically  true  that  modern  industrialism  was 
conditioned  on  a  sufficient  accumulation  of  money 
(which  Mexico  and  Peru  began  to  furnish  in  the 
sixteenth  century),  yet  the  production  of  a  plentiful 
substitute  for  money  by  hothouse  methods  can  only 
end  in  a  panic. 

About  all  the  official  political  economists  of  our 
day  and  other  writers  on  finance  declare  that  if  such 
a  panic  occurs,  it  will  be  the  result  of  exaggerated 
commodity,  land,  and  security  prices,  themselves  due 
to  the  increased  supply  of  money  and  its  consequent 
depreciation.  Their  vagaries  are  due  to  a  firm 
resolution  not  to  listen  to  the  scientific  theory  of 
value. 

After  the  creation  of  all  these  promises  to  pay,  or 
titles  to  money,  is  there  any  difference  in  the  regard 
in  which  a  dollar  in  gold,  a  dollar  in  paper,  or  a  dollar 
in  a  check  are  held?  No,  they  are  on  a  parity. 
There  has  been  no  inflation  of  the  paper  tokens,  hence 
no  depreciation  of  the  same.  The  titles  to  money 
are  still  sustained  by  the  faith  in  the  social  solvency. 
The  promises  to  pay  in  standard  money,  or  in  symbols 
thereof,  are  still  believed  to  be  good.  Therefore  all 
these  substitutes  of  gold  circulate  on  the  basis  of  the 
value  of  the  latter.  Has  this  value  declined,  because 
of  the  activity  of  the  paper  mills?  Have  the  latter 
brought  about  a  reduction  in  the  cost  of  mining  gold? 
And  if  not,  have  the  mines  stopped  working  because 
of  the  decline  in  the  exchangeable  value  of  gold?  No, 
we  shall  hear  nothing  of  that;  the  mines,  with  un- 


Money  of  Account  137 

changed  cost  of  production,  will  still  be  working 
profitably. 

What  really  has  occurred  is  an  increased  demand 
for  means  of  production,  resulting  in  the  advance,  not 
of  their  value,  but  of  their  prices,  as  well  as  eventually 
of  the  prices  of  articles  of  consumption,  land,  and 
corporation  shares.  It  is  the  violent  deviation  of 
price  from  value  which  is  precarious  and  which  calls 
for  rectification  by  the  violent  means  of  a  panic. 

Now  we  have  arrived  at  the  point  when  we  may 
consider  the  question : 

How  good  are  these  titles  to  money? 

In  the  first  place  they  are  not  titles  to  gold,  but 
only  to  legal  tender.  Should  the  tokens  which  are 
such  tender  depreciate  relatively  to  gold  the  money 
of  account  would  depreciate  in  exactly  the  same 
measure. 

In  the  second  place  these  titles  are  only  enforceable 
by  the  owners  against  the  banks  as  technically  their 
debtors.  We  have  seen  above  that  the  accumulation 
of  profits  to  the  extent  that  they  are  concentrated  in 
the  banks,  and  so  far  realized  only  on  paper,  amount 
to  20,824  million  dollars.  Out  of  this  sum  17,936 
millions  represent  practically  profits  of  industrial 
capitalists  in  the  shape  of  claims  against  the  banks. 
To  satisfy  these  claims  in  money  the  banks  had  on 
the  same  date,  as  also  stated  above,  1561  million 
dollars.  That  is  they  held  less  than  nine  cents  in 
money  against  every  dollar  they  owed.  But,  it  may 
be  thought,  if  the  creditors  demand  their  money,  the 
banks  could  convert  their  other  assets  into  money. 
For  money  it  now  must  be,  the  real  thing — no  make- 


138  Capital  To-Day 

believe .  The  checks  had  been  deposited ,  theoretically 
lor  collection  of  their  amounts  in  money;  if  the  bank, 
instead  of  collecting  the  money,  had  squared  with 
another  bank,  holding  a  similar  check  against  itself, 
that  is  its  own  affair.  Now,  where  is  the  money  to 
pay  for  the  banks'  assets  which  are  to  be  realized? 

On  June  30, 1913,  the  stock  of  money  in  the  United 
States  was  distributed  as  follows^: 

United  States  Treasury     $    356,000,000 
Banks  as  reserves  1,552,000,000 

Active  circulation  1,81 2,000,000 


Total        $3,720,000,000 

The  banks  cannot  get  the  money  of  the  govern- 
ment which  is  held  as  reserve  against  the  greenbacks 
and  for  current  expenses;  they  also  cannot  get  the 
money  in  circulation,  and  needed  in  circulation, 
because  the  moment  they  were  to  stop  the  exit  of 
currency,  its  deposit  by  the  capitalists  would  stop 
likewise.  Besides  they  would  be  confessing  their 
insolvency  and  expose  themselves  to  bankruptcy. 
During  the  panic  of  1907  the  banks  generally  were 
obliged  to  suspend  payment;  on  that  occasion,  how- 
ever, only  comparatively  few,  like  the  Knickerbocker 
Trust  Co.,  were  actually  forced  into  bankruptcy,  but 
the  storm  will  not  always  blow  over  so  easily. 

Thus  there  remains,  as  the  only  thing  that  could 
be  thought  of,  the  exportation  and  sale  abroad  of  the 
bank  assets.    These,  however,  are  mainly  non-export- 

'  Report  of  Comptroller  of  the  Currency,  1913,  p.  54. 


Money  of  Account  139 

able,  the  principal  item  being  real  estate  mortgages 
and  promissory  notes.  So  far  as  their  holdings  of  pub- 
lic securities  are  concerned  we  already  had  occasion  to 
note  in  Chapter  IV.,  section  b,  that  the  export  of  a 
relatively  small  amount  of  these  had  to  be  made  at 
panic  prices ;  for  the  payment  of  the  entire  indebted- 
ness of  our  banks  we  know  that  the  gold  in  the  whole 
world  would  only  half  suffice,  while  on  the  other  hand 
insistent  selling  by  this  country  at  any  price  would 
mean  the  utter  extinction  not  only  of  American,  but 
of  the  whole  world's  fictitious  capital.  All  banks  in 
the  world  would  fail — it  would  be  a  social  cataclysm. 

For  when  men  have  been  seized  with  doubt  as  to 
the  convertibility  of  their  titles  to  money  into  the 
substance,  the  cry  for  money  will  not  cease  at  the 
paying  tellers'  windows  as  long  as  there  are  unpaid 
depositors.  But  the  disparity  between  the  mass  of 
the  illusory  money  of  account  and  the  means  of  its 
realization  is  too  great  to  be  overcome. 

Without  closer  examination  the  impression  might 
arise  that  this  disparity  might  be  very  materially 
lessened  by  the  banks'  refusal  to  honor  the  checks 
of  depositors  who  are  at  the  same  time  their  debtors. 
Such  action  on  their  part  would  be  arbitrary,  the 
claims  of  such  persons  as  depositors  being  very 
generally  due  before  their  debts  to  the  banks. 
Nevertheless  the  banks  would  be  successful  in  their 
attitude,  assuming  a  disposition  on  the  part  of  the 
judges  to  come  to  the  rescue  of  the  banks  and  of 
society.  Now,  what  is  the  extent  to  which  the  banks 
might  repress  the  demand  for  money? 

Of  their  total  loans,  amounting  in  round  figures  to 


140  Capital  To-Day 

i±y2  billions,^  eight  billions  are  secured  by  real 
estate,  stocks  and  bonds,  warehouse  certificates,  etc., 
by  borrowers  having  generally  no  direct  banking 
relations  w4th  the  lending  bank.  For  instance, 
savings  bank  depositors  are  not  borrowers,  call  and 
time  loans  against  collateral  security  are  open  market 
operations.  Of  the  remaining  6}4  billions,  judging 
by  the  proportion  of  double  name  to  single  name 
paper  held  by  the  national  banks,  it  would  seem  that 
one  third  of  these  unsecured  loans  represents  com- 
mercial paper  bought  by  banks  in  the  open  market 
through  brokers.  The  makers  of  this  class  of  paper 
have  no  relations  with  its  holders,  do  not  even  know 
their  names.  Thus  out  of  the  entire  sum  of  eighteen 
billion  deposits,  probably  not  more  than  four  billions 
represent  accommodation  loans  by  banks  direct  to 
their  own  depositors,  and  as  the  latter  are  supposed 
to  maintain  an  average  balance  of  one  fourth  or  one 
fifth  of  their  loans  on  deposit,  the  total  sum  that  the 
banks  might  succeed  in  holding  up  would  be  under 
present  conditions  about  one  billion.  The  difference 
would  not  raise  the  ratio  of  the  current  money  held 
by  the  banks  to  the  money  of  account  to  ten  cents  on 
the  dollar,  instead  of  nine. 

And  yet,  as  we  have  seen,  money  of  account  has 
been  increasing  ten  times  as  fast  as  gold  and  token 
money  combined.  We  shall  see  in  section  b  of  the 
next  chapter  that  for  a  number  of  years  past  this  rate 
of  increase  has  grown  to  be  twenty  fold.  If  the  capi- 
talist class  continues  to  be  blessed  with  prosperity  in 
the  future  as  in  the  past,  its  bank  account  will  arrive 

'  Comptroller  of  the  Currency  Report,  19 13,  p.  51. 


Money  of  Account  141 

at  the  point  where  it  will  rest  on  a  comparatively 
infinitesimally  small  basis — the  proverbial  pyramid 
nicely  balanced  on  its  apex !  This  feat  the  capitalist 
class  will  have  to  perform  with  its  bank  account. 

Already  in  the  panic  of  1907  money  of  account  was 
at  a  discount  of  as  much  as  5  per  cent,  compared  not 
alone  with  gold,  but  with  any  kind  of  current  money, 
and  it  remained  at  a  discount  for  a  month.  So  long 
as  the  conviction  abides  with  every  capitalist  that  he 
can  personally  make  good  his  title  to  money  at  any 
moment,  he  will  of  course  abstain  from  doing  so, 
especially  as  checks  are  more  handy  and  otherwise 
more  advantageous.  If  it  were  only  a  question  of  the 
transfer  of  money  of  account  from  one  depositor  to 
another,  their  relative  titles  to  value  would  remain 
unchanged  under  any  circumstances.  But  transfers 
without  purchase  of  commodities,  such  transfers  as 
loans,  settlement  of  losses,  etc.,  can  only  be  incidental 
to  the  regular  course  of  the  exchange  of  commodities ; 
and  the  capitalists  who  own  the  commodities  are,  as 
such  owners,  not  identical  with  the  capitalists  who 
own  the  money  of  account  and  will  only  part  with 
their  commodities,  which  are  absolute  value,  against 
money  of  account  so  long  as  the  latter's  realizability 
in  other  values  remains  undoubted.  But  if  confi- 
dence is  shaken,  it  is  only  a  question  of  the  degree  of 
severity  of  the  resultant  panic,  to  what  extent  the 
money  of  account  may  be  depreciated,  or  whether  it 
may  become  extinguished  altogether,  carr^-ing  down 
in  its  debacle  not  only  the  superimposed  system  of 
fictitious  values  of  all  kinds,  but  the  entire  capitalist 
system  of  society. 


142  Capital  To-Day 

At  first  sight  it  might  seem  as  if  such  complete 
destruction  would  affect  only  one  division  of  capital, 
the  fictitious,  and  would  leave  intact  all  real  capital 
values.  A  little  reflection,  however,  will  siiffice  to 
show  that  such  an  impression  would  be  erroneous. 
Of  what  use  to  the  capitalists  would  be  the  owner- 
ship of  mills,  machinery,  and  other  fixed  capital, 
without  the  money  wherewith  to  buy  the  necessary 
materials  and  to  pay  wages?  Or  of  what  use  to  a 
man  would  be  a  warehouse  full  of  such  a  most  neces- 
sary product  as  flour,  if  he  cannot  obtain  money  for 
it?  And  the  money  practically  does  not  exist.  Real 
money,  even  in  the  heyday  of  capitalist  prosperity, 
cut  but  a  small  figure  in  the  sum  which  was  needed 
to  do  the  world's  business.  Now  a  great  part  of  the 
gold  and  silver  will  have  gone  into  hiding,  as  a 
provision  against  the  most  pressing  needs.  What 
had  but  a  short  time  ago  been  believed  to  be  money 
is  now  recognized  as  having  been  a  stupendous 
deception  of  great  advantage  to  the  capitalists  while 
it  lasted.  The  time  has  now  matured  when  the  mills, 
machinery,  merchandise,  etc.,  have  ceased  to  serve 
their  owners  as  the  means  of  garnering  profits;  they 
have  become  as  barren  to  them  as  sources  of  revenue 
as  their  now  worthless  pieces  of  lithographed  "secur- 
ities." They  have  lost  their  artificial,  though  his- 
toric, character  as  capital  and  are  waiting  to  assume 
their  natural  character  as  means  of  production,  no 
longer  of  commodities,  but  of  use-values.  Com- 
petitive capitalism  had  come  to  rest  on  a  fiction  and 
was  an  economic  impossibility. 

Before  leaving  this  special  inquiry,  it  is  worth  while 


Money  of  Account  143 

to  take  a  closer  look  at  the  deposits  in  the  savings 
banks,  which  are  included  in  the  above  total  deposits, 
on  account  of  the  wide-spread  belief  that  these  par- 
ticular banks  represent  the  savings  of  the  working- 
man.  This  unfounded  belief  is  taken  advantage  of 
by  the  capitalists,  whenever  some  political  issue  is 
raised  inimical  to  their  interests,  in  order  to  enlist 
the  support  of  the  wage  workers  on  the  ground  of  the 
latter's  interest  as  capitalists.  This  appeal  to  the 
self-interest  of  the  workers  as  capitalists  is  of  a  piece 
with  that  other  in  which  the  capitalists,  unselfishly 
forgetful  of  themselves,  work  on  the  sympathy  of  the 
general  public  for  the  widows  and  orphans  who  must 
make  shift,  poor  things,  to  live  on  their  income  from 
stocks  and  bonds,  which  income  is  held  up  to  the 
public  conscience,  as  if  it  were  the  principal  interest 
menaced  by  said  political  issue. 

Without  losing  our  time  with  the  bedevilment  of 
the  question  by  the  Comptroller  of  the  Currency  in 
his  report  of  1913,  where  he  makes  out  (p.  57)  17,600,- 
000  savings  accounts,  including  therein  any  deposits 
at  interest  in  any  kind  of  bank,  let  us  at  once  direct 
our  attention  to  the  mutual  savings  banks,  the  only 
ones  in  which  working  people  deposit  savings.  These 
the  Comptroller  reports  (p.  65)  as  having  3770 
milhon  dollars  deposits  from  8,101,238  depositors, 
the  average  being  $465.31. 

Now,  this  information  about  the  number  of  de- 
positors and  their  average  deposit  is  absolutely  mean- 
ingless, as  we  shall  understand  presently. 

First  as  to  the  number  of  depositors.  This  subject 
was  most  fully  investigated  in  Massachusetts  as  early 


144  Capital  To-Day 

as  1872  by  the  Bureau  of  Statistics  of  Labor  which 
reported:  "Repeated  instances  were  found  of  men 
having  in  each  of  many  banks  deposits  to  the  hmit  of 
the  law.  .  .  .  One  man  was  reported  to  have  a 
deposit  in  each  bank  of  the  State ;  another  will  deposit 
for  each  member  of  his  family  and  a  part  of  the 
alphabet."  From  these  facts  it  is  plain  that  deposi- 
tors can,  to  comply  with  the  law,  easily  multiply 
their  persons  many  times,  and  that  the  number  of 
accounts  is  no  indication  as  to  the  number  of  de- 
positors or  to  the  importance  of  their  deposits  in- 
dividually. 

Now  as  to  the  average  deposit.  If  Mr.  Rockefeller 
has  a  billion  dollars  and  I  nary  a  dollar,  the  two  of 
us  own  on  the  average  half  a  billion  each,  but  I  fail 
to  derive  any  satisfaction  from  the  calculation.  The 
Massachusetts  Bureau  just  mentioned  found  that  in 
1871  one  fourteenth  of  the  deposit  accounts  amounted 
to  nearly  one  half  of  the  total  in  amount  and  that  the 
proportion  of  large  depositors  in  the  savings  banks 
was  on  the  increase. 

From  what  we  have  learned  from  the  Bureau 
regarding  plural  depositors,  it  is  clear  to  us  that  one 
fourteenth  of  the  deposits  is  by  no  means  equivalent 
to  that  proportion  of  depositors.  And  what  of  those 
only  nearly  as  large?  However,  the  statement  fur- 
nishes a  sufficient  index  to  the  fact  of  real  interest 
that,  while  the  immense  majority  of  depositors  may  be 
wage  workers,  the  great  bulk  of  the  deposits  are  those 
of  capitalists.  Considering  the  workingmen's  de- 
posits, not  in  relation  merely  to  their  depositors,  but 
to  the  wage-working  class  in  its  entirety,  it  will  be 


Money  of  Account  145 

found  that  this  class  which  constitutes  the  over- 
whelming majority  of  the  American  people  is  prac- 
tically penniless. 

Since  the  publication  of  the  Massachusetts  report, 
which  at  the  time  created  an  awkward  situation  for 
the  high  tariff  manufacturers  of  Massachusetts,  who 
pleaded  then,  unselfishly  forgetful  of  themselves,  for 
the  protection  of  the  American  workingman  against 
the  pauper  labor  of  Europe,  similar  publications  have 
been  suppressed  and  it  is  preferred  to  leave  the  ques- 
tions involved  in  a  fog.  Recently  a  demand  has 
been  voiced  by  a  number  of  social  welfare  people  in 
Chicago  and  New  York  for  the  publication  of  the 
classification  of  savings  banks  deposits  according  to 
amounts.  Such  publication  would  be  instructive  only 
to  a  limited  degree  on  account  of  the  plurality  of 
deposits  representing  the  identical  ownership.  The 
only  way  to  admit  the  light  is  by  removing  the 
limitation  of  amount  which  may  be  deposited  by 
anyone  and  recognizing  the  savings  banks  in  law  as 
what  they  are  essentially  in  fact — investment  con- 
cerns for  small  capitalists  and  middle-class  people. 

Under  the  capitalist  system  of  society  production 
is  carried  on  primarily  for  profit  and  only  secondarily 
or  incidentally  for  consumption.  Things  are  pro- 
duced as  commodities  and  exchanged  on  the  open 
market  on  the  basis  of  the  labor  socially  necessary  for 
the  production  of  each.  Profit  is  made  possible  by 
the  existence  of  one  particular  commodity,  human 
labor  power,  whose  use-value  consists  in  its  ability 
to  create  for  its  purchaser  value  in  excess  of  the  cost 
of  production  of  human  labor  power,  viz.,  the  usual 


146  Capital  To-Day 

wages  of  subsistence.  The  "open  market"  (also 
called  "liberty")  meant  in  capitalist  theory  produc- 
tion under  fairly  equal  conditions  and  exchange  of  the 
products  without  artificial  restraints  (a  condition 
called  "natural  law").  This  ideal  was  approached 
only  in  the  youth  of  capitalism,  when  England  was 
the  only  industrial  country  in  the  world.  The 
capitalistic  monopoHes  and  the  trade  unions  of  our 
time  are  denials  of  capitalist  theory  and  they  herald 
the  coming  end  of  competitive  commodity  produc- 
tion. 

This  system  of  production  was  only  possible  with 
the  social  recognition  of  a  single  exclusive  commodity 
as  money.  Gold,  in  having  been  set  aside  for  the 
money  functions,  has  not  lost  the  attributes  of  a 
commodity,  as  all  gold  money  can  be  used  as  a 
commodity  without  loss  of  value. 

These  functions  are  contradictory  between  them- 
selves. Insiifficiency  of  the  money  commodity  is 
a  necessary  condition  for  its  function  of  standard  of 
value.  But  this  very  requirement  of  insufficiency 
renders  gold  utterly  incapable  of  fulfilling  its  other 
functions  of  means  of  circulation  and  of  deferred 
payment.  The  contrivances  of  money  tokens  and 
money  of  account,  to  take  the  place  of  the  needed  but 
deficient  gold,  are  admissions  of  the  fact.  These 
emblems  have  heretofore  functioned  tolerably  in  lieu 
of  gold,  only  occasionally  giving  rise  to  difficulties. 
But  the  continuous  and  irresistible  growth  of  the  mass 
of  these  emblems,  and  the  increasing  disparity  in 
the  proportion  of  this  mass  to  that  of  the  gold,  renders 
their  parity  more  and  more  precarious  and  will  ulti- 


Money  of  Account  147 

mately  make  it  impossible.  The  financial  system 
has  operated,  though  with  creaking  and  cracking,  on 
the  strength  of  the  social  faith  that  it  will  never  be 
subjected  to  much  worse  than  normal  strain.  How- 
ever, it  is  plainly  to  be  foreseen  that  the  more 
artificial  the  system  becomes,  the  more  it  is  liable  to 
call  forth  crises  of  increasing  severity.  An  untoward 
event  of  sufficient  magnitude,  especially  a  great  war, 
may  put  such  a  strain  on  the  financial  mechanism 
in  all  countries  as  to  produce  the  most  tremendous 
consequences  to  the  form  of  society  to  which  this 
mechanism  is  indispensable.  The  degree  to  which 
society  loses  faith  in  symbols  of  money  expresses 
itself  in  their  depreciation  relatively  to  gold.  The 
depreciation  of  paper  money  carries  with  it  that  of 
bank  checks. 

Now  what  effect  would  an  important  depreciation 
of  emblematic  money  have  on  the  economic  condi- 
tion of  the  world? 

That  kind  of  money  has  been  created  to  the  extent 
that  the  gold  would  have  been  needed  at  any  given 
time.  Every  dollar  of  it  had  passed  from  hand  to 
hand  as  the  equal  of  a  gold  dollar.  Now  it  is  found 
that  the  world's  stock  of  money,  as  expressed  in  the 
value  of  gold,  is  reduced  say  by  25%,  50%,  75%. 
The  destruction  of  billions  of  money  cannot  be  made 
good  by  printing  more  tokens.  No  matter  how  great 
their  mass,  their  sum  would  always  represent  the  same 
total  money  value.  If  former  stringencies  in  the 
money  market  have  resulted  in  periods  of  industrial 
depression,  with  wide-spread  unemployment  and 
misery,   what  may  be  expected  if  say  half  of  the 


148  Capital  To-Day 

existing  money  value  is  destroyed?  Hov/  carry  on 
the  industries  on  the  then  existing  scale?  How 
conduct  international  business  after  a  country  has 
parted  with  its  gold  or  hoarded  it,  whether  in  a  cen- 
tral fortress  or  in  many  stockings? 

That  the  United  States  came  unscathed  out  of  the 
depreciation  of  its  greenbacks  to  as  low  a  value  as 
thirty-five  cents  for  the  gold  dollar  cannot  be  cited  as 
an  argument  against  our  thesis.  That  happened  prior 
to  the  great  financial  expansion,  in  a  single  country, 
then  neither  financially  or  industrially  of  the  highest 
importance.  It  was  able  to  draw  on  Europe  for  the 
needed  money.  The  condition  will  be  altogether 
different  when  depreciation  is  international  and 
simultaneous;  when,  owing  to  the  very  fact  of  the 
reduced  value  of  emblematic  money,  the  banks  of 
the  world  are  subjected  to  an  abnormal  strain  by  the 
demand  for  gold  or  for  such  large  sums  of  tokens  as 
would  match  the  gold;  when  all  nations  would  fain 
borrow  gold,  but  no  nation  can  afford  to  lend.  And 
when  the  world's  banks  find  it  impossible  to  meet  the 
unprecedented  and  never  in  the  past  contemplated 
demands  for  money,  then  no  man  living  can  fail  to 
see  that  the  financial  mechanism,  a  tool  whose  use- 
fulness in  its  day  can  scarcely  be  exaggerated,  has 
broken  down  finally  and  irretrievably.  Necessity 
will  then  prompt  everybody  to  put  his  hand  to  the 
removal  of  the  debris  and  the  bringing  of  the  New 
Order  out  of  the  chaos. 


CHAPTER  VII 

TOTALITY    OF    THE    MONEY    SYSTEM    IN    THE    UNITED 

STATES 

a.   Conditions  prior  to  Federal  Reserve  Act. 

In  Chapter  VI .  has  been  shown  the  division  or 
ownership  of  the  stock  of  money  in  the  country  as 
between  the  Treasury,  the  banks,  and  individuals, 
the  latter  division  representing  the  active  circulation. 
We  shall  now  have  to  see  what  are  the  kinds  of  money 
of  which  this  stock  consists.     It  is  reported  Nov.  i, 

1913,^  as  follows: 

Million 
dollars 
Gold  inclusive  of  gold  certificates  representing 

stored  gold 1,636 

Silver  inclusive  of  silver  certificates  representing 

stored  silver 554 

Silver  subsidiary  1 60 

United  States  notes 344 

National  bank  notes 7  23 

Total  outside  of  Treasury  3,417 

In  addition  to  a  gold  reserve  of  150  millions  against 
the  United  States  note  circulation,  the  government 

'  Report  of  Secretary  of  the  Treasury  1913,  p.  78. 

149 


150  Capital  To-Day 

held  on  June  30,  191 3  about  200  million  dollars  in 
gold,  tokens,  and  bank  deposits  for  current  expenses 
and  other  purposes,  which  fund  we  leave  out  of  con- 
sideration as  not  materially  affecting  our  purpose. 
Equally  without  practical  importance  are  discre- 
pancies between  statements  issued  a  few  months 
apart,  reflecting  such  minor  changes  as  result  from 
current  transactions. 

The  only  absolute  legal  tender  is  gold  coin,  which 
in  the  above  specification  is  lumped  with  the  gold 
certificates,  as  the  latter  can  be  converted  into  the 
former  on  presentation  at  the  Treasury,  which  holds 
the  corresponding  coins. 

Standard  silver  dollars  (similarly  lumped  with  the 
silver  certificates  convertible  into  them)  and  United 
States  paper  currency  are  legal  tenders,  but  may  be 
eliminated  by  contract.  This  is  being  done  in  the 
issue  of  bonds  by  the  government  and  by  the  cor- 
porations through  the  stipulation  making  the  principal 
and  interest  payable  in  gold. 

Bank  notes  are  not  legal  tender. 

Grouping  the  currency  as  to  value  we  find: 

Million 
dollars 

Money  of  full  value  (gold  in  circulation)...  .  1,636 

Silver   having   an   average   value   of  39%, 

nominal  value 714 

United  States  paper,  covered  to  extent  of 

150  million  dollars  in  gold 344 

Bank  notes  not  covered  by  value 723 

As  to  that  part  of  the  currency  which  is  issued  by 
the  government,  we  have  already  noted  above  that 


Totality  of  Money  System  in  U.  S.  151 

the  law  permits  a  distinction  to  be  made  by  contract 
between  gold  and  the  tokens.  Such  a  legal  distinc- 
tion between  the  two  kinds  of  money  appears  as  a 
contradiction  to  the  gold  standard  law  of  1900,  which 
directs  the  Treasurer  of  the  United  States  to  main- 
tain all  the  forms  of  money  issued  by  the  United 
States  at  a  parity  with  this  standard. 

If  it  is  sufficient  for  the  maintenance  of  the  parity 
to  give  the  necessary  legal  directions  to  the  Treasurer, 
and  if  these  are  expected  to  be  acceptable,  as  equiva- 
lent to  fulfilment,  to  the  lending  capitalists  (espe- 
cially in  foreign  countries),  the  buyers  of  our  long  term 
bonds,  there  would  seem  to  be  no  reason  for  the 
existence  of  such  a  contradiction.  But  in  reality  the 
lending  capitalists  understand  full  well  that  there  can 
be  no  dependence  on  the  continuance  of  the  parity 
on  the  strength  of  a  mere  declaration  of  purpose  to 
maintain  the  parity. 

The  demand  promissory  notes  of  the  banks  are 
private  credit  instruments  issued  against  another 
kind  of  credit  instruments,  viz.,  United  States  bonds, 
deposited  by  the  banks  with  the  Treasury  together 
with  5%  cash  as  a  redemption  fund  against  the  event 
of  the  failure  of  any  banks.  These  notes  are  re- 
deemable at  the  banks  of  issue  or  at  the  Treasury  in 
legal  tender.  If  we  contemplate  what  would  happen 
in  case  of  a  general  scramble  for  money  of  value,  this 
would  be  the  picture:  The  holders  of  150  million 
dollars  greenbacks  would  draw  out  the  gold  reserve, 
leaving  the  holders  of  194  million  dollars  greenbacks 
in  the  lurch;  the  holders  of  bank  notes  might  have  to 
accept   silver   tokens   of   a   low   intrinsic   value    or 


152  Capital  To-Day 

greenbacks  which  might  turn  out  to  be  convertible 
into  gold  or  into  nothing ;  or  the  holders  of  bank  notes 
might  retain  them  until  the  eventual  redemption  by 
the  government,  in  gold,  of  the  bonds  which  were 
seciirity  for  the  notes. 

Practically  in  the  question  of  parity  between  tokens 
and  gold  neither  the  credit  of  any  government,  nor 
the  particular  metal  in  which  the  tokens  may  be 
redeemable,  nor  their  irredeemability  is  involved. 
Their  usefulness  as  a  circulating  medium  depends 
solely  on  their  quantitative  limitation  relative  to 
the  minimum  circulation  requirement  of  gold  in  a 
country  at  any  given  time.  Tokens  may  be  aug- 
mented with  an  increase  in  the  stock  of  gold,  but  not 
independently  of  the  latter  on  pain  of  their  deprecia- 
tion. The  full  bearing  of  this  principle  may  not  be 
realized  by  those  who  think  only  of  the  fact  that  our 
country  has  passed  through  a  period  of  depreciated 
paper  currency  without  fatal  consequences.  These 
failed  to  arise  because  of  the  general  confidence  in 
the  ability  of  the  government  eventually  to  work  out 
of  the  situation,  which  was  then  not  complicated  by 
a  top-heavy  money  of  account.  The  case  will  be 
altogether  different,  if  the  logic  of  the  development  of 
capitalism  leads  to  a  deadlock, — the  need  of  ex- 
pansion of  the  currency  on  the  one  hand,  and  the 
impossibility  of  such  expansion  on  the  other  hand. 
For  the  token  is  ruled  by  the  gold — that  gold  from 
which  an  anarchical  society  cannot  emancipate 
itself. 

Grouping  now  the  country's  total  cash  resources  in 
their  three  main  qualitative  divisions,  we  have: 


Totality  of  Money  System  in  U.  S.  153 

Million 
dollars 

Gold  (1636  free,  150  in  treasury)  1,786 

Token  money  (deducting  150  covered)     1,631 

Money  of  account  20,824 

The  parity  of  token  money  with  gold,  we  repeat, 
depends  on  the  limitation  of  the  issue  of  the  former 
relatively  to  the  latter;  the  value  of  the  money  of 
account  depends  on  the  value  of  the  tokens  and  on  its 
being  readily  redeemable  in  them  or  in  gold. 

Any  shrinkage  in  the  sum  of  money  used  in  circula- 
tion, owing  to  industrial  depression  or  declining 
prices,  affects  solely  gold,  which,  as  absolute  value,  is 
retired,  hoarded,  or  exported  without  loss,  at  a  time 
when  commodities  or  securities  would  have  to  be 
sacrificed,  whereas  tokens  are  only  of  value  in  cir- 
culation. Acting  on  these  premises,  the  banks  main- 
tain their  more  permanent  reserves  in  gold  and  are 
generally  able  to  hold  on  to  at  least  half  of  the  free 
gc^ld.'  Of  course,  the  banks  are  bound  to  have  in 
their  possession  at  any  given  moment  large  stm:s  of 
tokens,  but  they  pass  them  on  by  preference,  and  so 
it  happens  that  in  contrast  to  their  hca\y  holdings 
of  gold  (or  gold  certificates),  the  bank  notes  in  their 
possession  on  June  4,  1913,  were  only  107  million 
dollars  or  one  scvtiitJi  of  the  total  issue. 

But  among  the  iniblic  nobody  thinks  of  discriminat- 
ing between  different  kinds  of  paper  money,  and 
naturally  so — the}''  are  all  on  a  par  and  circulation  is 
rapid. 

The  necessary  gold  basis  of  competitive  capitalism 

■  Animal  Report  of  the  Comjit roller  of  (lie  Currenoy,  1913,  p.  57« 


154  Capital  To-Day 

and  the  incompatibility  of  this  basis  with  the  irre- 
sistibly growing  mass  of  money  of  account  is  a  sign 
of  the  approaching  maturity  of  capital  and  a  part  of 
the  general  contradiction  between  the  old  individual- 
istic form  of  society  and  the  developing  need  of  social 
regulation  of  social  functions. 

Capitalists  are  not  inclined  to  take  a  serious  view 
of  the  problems  involved.  No  ruling  class  ever 
estimated  at  their  true  value  the  forces  making  for 
its  undoing.  The  capitalists'  cheerful  view  is  that 
panics  have  come  and  panics  have  gone,  and  after 
each  one  we  grew  richer  than  ever  before;  that  no 
doubt  there  will  be  runs  on  banks  again,  and  if  the 
small  cash  reserve  is  in  danger,  we  can  suspend  pay- 
ments, the  same  as  in  1907,  when,  nevertheless,  only 
a  few  banks  were  forced  into  bankruptcy;  in  short 
that  nothing  different  from  the  past  will  happen  in 
the  future. 

The  main  source  of  this  view  lies  in  the  ignorance 
of  those  expressing  it  regarding  the  age  of  the  present 
form  of  society.  They  believe  society  has  been  con- 
stituted as  at  present  for  a  very  long  time.  But  the 
capitalist  form  of  society  has  not  existed  for  a  very 
long  time,  and  especially  its  greatest  development, 
including  the  creation  of  the  entire  mass  of  money  of 
account,  is  a  matter  of  very  recent  history.  The 
development  of  the  system  of  fictitious  money  is 
progressing  at  such  a  furious  rate  that  there  is  no 
telling  how  soon  the  hour  may  come  when  it  may  be 
wrecked  by  its  negation  of  the  theory  of  value. 

The  belief  that  what  has  never  happened  before 
will  not  happen  hereafter,  while  comforting  in  some 


Totality  of  Money  System  in  U.  S.  155 

cases,  is  in  contradiction  to  the  theory  of  evolution, 
which  is  as  apphcable  to  human  affairs  as  to  things 
in  nature.  In  its  very  money  system,  quite  apart 
from  other  vital  problems  which  will  confront  it, 
changed  conditions  will  challenge  capitalism  to  prove 
that  it  need  not  be  superseded  by  a  superior  organiza- 
tion of  society. 

b.  Federal  Reserve  Act. 

The  experiences  during  the  panic  of  1907,  when  the 
banks  stopped  payment  and  currency  went  to  a 
premium  over  checks,  have  furnished  the  ostensible 
grounds  for  the  enactment  on  December  23,  1913,  of 
the  "Federal  Reserve  Act,"  of  which  the  principal 
purpose,  as  stated  in  the  Act,  is  "to  furnish  an  elastic 
currency."  By  the  term  "elastic"  currency  is  or- 
dinarily meant  one  having  the  faculty  of  expanding, 
when  required  by  the  need  of  an  increased  circulation, 
and  contracting  when  that  need  is  decreasing.  To 
be  sure  an  elastic  currency  is  needed  by  a  form  of 
society  which  is  not  master  of  its  material  affairs 
and  therefore  finds  itself  swept  periodically  from  the 
height  of  prosperity  into  the  depth  of  economic 
depression.  We  know  that  the  element  of  elasticity 
inheres  only  in  gold,  which,  being  value,  is  as  free  to 
leave  circulation  as  to  enter  it. 

Now,  the  panic  of  1907  had  been  ascribed  to  the 
lack  of  elasticity  in  our  present  monetary  system,  in 
which  the  currency  was  a  given  maximum  quantity 
limited,  once  and  for  all,  by  the  definite  government 
issue  thereof,  and  limited  also  by  the  sum  of  govern- 


156  Capital  To-Day 

ment  bonds  which  could  serve  as  security  for  the 
issue  of  notes  by  the  national  banks.  Such  a  criti- 
cism of  a  system  of  money,  consisting  partly  of  gold 
and  partly  of  tokens,  is  based  on  the  belief  that  the 
tokens  can  be  made  to  furnish  the  element  of  elasticity, 
and  on  this  alleged. belief  the  new  banking  and  cur- 
rency law  has  been  enacted. 

What  was  really  patent  in  1907  was  the  insuffi- 
ciency of  the  cash  holdings  of  the  banks  to  meet  the 
demands  of  the  depositors  for  their  money;  at  no 
time  since  has  there  been  discernible  any  sign  of 
redundancy  of  the  currency.  It  could  therefore 
only  be  said  that  the  currency  was  deficient  in  elas- 
ticity in  the  direction  of  expansion,  which  is  a  matter 
of  course,  inasmuch  as  the  mass  of  the  circulating 
medium  must  depend  on  the  existing  quantity  of  gold, 
and  this  cannot  be  increased  at  will.  But  it  could 
not  be  argued  that  elasticity  did  not  exist  in  the 
direction  of  contraction  by  gold  dropping  out  of 
circulation  when  not  needed.  Instead  of  stating  the 
purpose  of  the  Act  by  the  current  and  threadbare 
expression,  "to  furnish  an  elastic  currency,"  which 
does  not  quite  fit  the  case,  it  would  have  sounded 
less  pleasing,  perhaps,  but  would  have  been  more  to 
the  point,  to  have  described  the  purpose  of  the  Act 
as  instituting  new  machinery  for  the  issue  of  an 
additional  kind  of  paper  money.  The  utmost  extent 
to  which  this  issue  may  take  place  cannot  be  foretold, 
but  the  workings  of  the  new  system  will  be  about  as 
follows : 

The  national  banks,  and  probably  many  State  banks 
as  soon  as  the  State  laws  shall  have  been  amended, 


Totality  of  Money  System  in  U.  S.  157 

will  be  associated  together  in  twelve  Federal  Reserve 
Banks,  located  in  as  many  cities,  each  member  bank 
becoming  a  stockholder  pro  rata  of  its  capital  and 
surplus,  three  per  cent,  being  contemplated,  although 
calls  up  to  six  per  cent,  are  provided.  The  President 
of  the  United  States  appoints  the  governing  body  of 
the  Federal  bank  system,  the  Federal  Reserve  Board, 
consisting  of  seven  members,  including  the  Secretary 
of  the  Treasury  and  the  Comptroller  of  the  Currency. 
The  system,  as  we  already  see,  is  partly  private, 
partly  governmental.  The  stockholders  are  entitled 
to  a  cumulative  dividend  of  6%  per  annum  before 
the  government  derives  a  revenue  from  surplus  pro- 
fits. As  the  President  is  the  head  of  one  of  the  politi- 
cal parties  which  is  in  power,  his  appointments  to  the 
Board,  if  confirmed  by  the  Senate,  are  apt  to  express 
the  wishes  of  the  ruling  party  with  regard  to  the 
policy  of  the  Federal  banks.  The  capital  of  these 
will  be  further  made  up  by  the  mandatory  transfer 
to  them  of  about  a  third  of  the  member  banks' 
cash  reserves  and  by  the  government's  deposit  of  its 
cash  assets  (money  belonging  to  it,  not  that  held  by 
it  in  trust).  The  total  capital  of  the  new  banks  will 
thus  at  the  beginning  be  about  600  millions  dollars 
gold. 

Of  course,  this  is  not  new  gold — a  legislative  act 
cannot  produce  that,  though  it  may  produce  new 
paper  money.  This  gold,  either  in  its  yellow,  glitter- 
ing reality  or  by  representation,  had  been  lying  else- 
where, mainly  in  bank  vaults,  as  "reserves,"  doing 
nothing,  just  waiting  for  something  to  turn  up. 
The  ownership  of  money  being  a  social  title  to  profit 


158  Capital  To- Day 

under  capitalism,  the  sterility  of  all  these  "reserves" 
goes  against  the  grain  of  the  standard  "human  na- 
ture "  of  the  capitalist  epoch.  Thus  arose  the  idea 
of  "mobilizing  the  reserves,"  realized  now  by  the 
enactment  of  the  Glass-Owen  law  without  specific 
statement  of  such  being  one  of  its  purposes,  although 
this  favorite  expression  is  as  euphonious  in  its  way 
as  "elastic  currency"  in  another. 

It  must  not  be  imagined  that  the  word  "reserves" 
means  a  sum  of  money  laid  aside  in  order  to  be 
immediately  available  in  a  time  of  sudden  stress. 
The  word  includes  all  cash  funds  held  by  the  banks, 
including  those  which  they  need  in  the  regular  course 
of  their  everyday  business  and  which  are  as  necessary 
to  them  daily,  in  the  most  calm  times,  as  their  tellers' 
windows. 

Why  were  these  reserves  removed  from  one  place 
to  another?  Because  in  their  new  place  they  are 
under  the  control  of  the  government,  which  is  to 
mobilize  them  with  a  vengeance  by  issuing  two  and 
one-half  to  nearly  three  times  as  much  paper  money 
against  them  in  accordance  with  the  following 
method : 

After  a  member  bank  has  lent  to  somebody  say 
$1000  and  received  for  this  sum  a  promissory  note  or 
similar  evidence  of  debt  (commercial  paper),  it  can 
have  this  note  rediscounted  by  the  reserve  bank  with 
brand  new  government  bills,  provided  said  member 
bank  has  $400  gold  on  reserve  with  the  reserve  bank 
or  can  produce  that  much  gold  from  its  own  vault. 
Then  the  member  bank  can  lend  out  the  same  $1000 
for  a  second  time,  and  can  continue  the  operation  as 


Totality  of  Money  System  in  U.  S.  159 

long  as  it  can  take  $400  gold  from  its  reserves,  which 
are  idle  anyhow,  and  transfer  them  to  the  reserve 
bank. 

Appreciation  of  the  opportunity  thus  afforded  to 
the  banks  to  make  an  additional  profit  was  expressed 
by  Newton  D.  Ailing,  Vice-President  of  the  National 
Nassau  Bank,  New  York,  as  reported  in  the  New  York 
Times  of  Dec.  21,  1913: 

What  would  an  intelligent  manager  of  a  mercantile 
business  do  if  he  were  afforded  an  opportunity  to  invest 
10  per  cent,  of  his  capital  in  something  which  could  result 
in  at  once  doubling  the  capital  at  his  command?  He 
would  seize  it.  This  is  exactly  what  is  afforded  to  the 
national  banks  by  the  Federal  Reserve  Act. 

The  initial  capital  of  the  reserve  banks  of  about 
600  million  dollars  will  furnish  the  groundwork  for 
the  issue  of  new  paper  tokens  to  the  tune  of  1500 
million  dollars.  The  quantity  of  gold  in  the  land 
will  have  remained  unchanged,  but  the  paper  cir- 
culation will  have  increased  by  1500  million  dollars. 
Nor  is  this  all.  As  other  than  national  banks  join 
in  the  reserve  system  or  avail  themselves  of  it 
indirectly  through  member  banks,  and  as  the  gold 
certificates  which  still  circulate  rather  freely  among 
the  people  are  more  assiduously  collected  by  the 
banks  for  reserve  bank  purposes,  the  new  paper 
tokens  will  further  be  augmented  to  an  extent  limited 
only  by  the  available  gold  required  as  reserve  against 
the  new  paper  tokens  and  by  the  degree  of  discretion 
exercised  by  the  Federal  Reserve  Board,  there  being 
no  limit  set  by  the  law  itself.     And  during  all  this 


i6o  Capital  To-Day 

time  there  is  no  increase  in  the  gold ;  on  the  contrary 
this  might  have  occasion  to  exercise  its  contractile 
faculty,  after  the  tokens  have  furnished  the  dem- 
onstration of  their  power  as  the  expansive  element 
of  "elastic  currency." 

As  the  greater  part  of  the  new  reserve  notes  will 
be  issued  in  the  rediscounting  of  commercial  paper 
having  not  over  ninety  days  to  run,  it  might  be  held 
that  the  reserve  board  could,  on  indications  of  an 
approaching  squall,  retire  notes  by  refusing  renewals 
of  discounts.  Who  cannot  already  hear  the  outcry 
of  the  involved  capitalists  that  such  action  will  pre- 
cipitate the  worst  panic,  etc.?  Will  the  board  have 
the  nerve  to  weather  the  storm  of  protest  raised  by 
them?  Besides  commodity  prices  may  have  adjusted 
themselves  to  the  inflated  volume  of  currency,  which 
therefore  will  be  actually  needed,  as  set  forth  in 
Chapter  V.,  Sec.  b. 

But  we  are  forgetting  all  about  the  bank  deposits 
as  a  sort  of  protection  to  which,  though  found  inade- 
quate in  the  emergency  of  1907,  the  gold  was  once 
held.  Of  course,  nobody  can  serve  two  masters,  and 
the  gold  cannot  at  the  same  time  serve  as  a  protection 
to  the  bank  deposits  and  to  the  new  government 
notes.  If  it  had  been  the  purpose  of  the  Federal 
Reserve  Act  to  concentrate  the  banks  for  times  of 
stress  only,  under  the  management  and  with  the  aid 
of  the  government,  their  maintenance  of  the  former 
volume  of  individual  reserves  would  have  become 
correspondingly  less  imperative  for  the  time  being. 
But  these  Federal  Reserve  banks  have  a  wider  scope 
than  that;  they  are  expected  year  in  and  year  out  to 


Totality  of  Money  System  in  U.  S.  i6i 

earn  their  expenses,  including  no  doubt  the  mainte- 
nance of  a  number  of  branch  offices,  pay  a  dividend  to 
the  stockholders  and  a  revenue  to  the  government. 
They  are  to  be  in  active  business  in  fair  weather,  as 
well  as  in  foul,  and  the  easy  money  obtainable 
through  the  banks  when  all  is  well  will  not  fail  to 
stimulate  the  enterprise  of  the  capitalists.  And 
when  the  test  comes  for  the  new  currency  to  prove  its 
elasticity  by  coming  to  the  relief  of  the  money  market 
in  time  of  panic,  said  currency,  or  rather  the  gold 
necessary  for  getting  it,  will  be  "  introuvable, " — 
unfindable, — as  the  French  say,  having  already  been 
absorbed  in  the  general  capitalist  expansion. 

The  situation  then  existing  will  resemble  that  in 
which  we  see  the  banking  system  of  Great  Britain 
and  Ireland,  thus  referred  to  by  a  standard  author- 
ity': "The  deposits  in  the  savings  banks  have  now 
(end  of  1905)  increased  to  upwards  of  ;!^2o6,ooo,- 
000,"  "but  of  cash  ...  in  reserve  against  a  panic 
— the  savings  banks  have  not  a  sixpence."  "They 
hold  securities  of  the  best  kind,"  but  "if  in  a  gen- 
eral panic  there  were  a  run  on  the  savings  banks, 
those  banks  could  not  sell  £100,000  of  consols  with- 
out the  help  of  the  Bank  of  England."  "This  is 
only  a  single  additional  instance  beyond  .  .  .  innu- 
merable ones." 

In  this  state  of  affairs  this  authority  has  "pointed 
out  a  deep  malady,"  but  being  "a  system  of  credit 
which  has  slowly  grown  up"  "it  is  of  no  manner  of 
use  proposing  to  alter  it,"  any  more  than  "try  to 

'  Lombard  Street,  by  Walter  Bagehot,  chap,  xiii.,  p.  332,  edition 
of  1910. 


i62  Capital  To-Day 

alter  the  English  monarchy  and  substitute  a  re- 
public,"— which  would  of  course  be  the  height  of 
absurdity. 

Speaking  of  the  ratio  of  cash  to  bank  deposits  in 
general,  the  same  authority  says":  "The  amount  of 
that  cash  is  so  exceedingly  small  that  a  bystander 
almost  trembles,  when  he  compares  its  minuteness 
with  the  immensity  of  the  credit  which  rests  upon 
it." 

It  is  perfectly  clear  that  if  the  Bank  of  England 
fails  all  other  banks  in  Great  Britain  and  Ireland  are 
liable  to  fail.  Heretofore  it  has  been  possible  on 
several  occasions  to  save  the  Bank  of  England  from 
failure  by  breaking  the  Peel  Act,  ^  from  which  it  can 
by  no  means  be  concluded  that  the  issue  of  fiat  paper 
money  will  accomplish  the  same  purpose  in  the 
future.  Obviously  we  are  living  under  a  system 
which  is  becoming  more  artificial  every  day  and  is 
bound  sometime  to  come  down  like  a  house  of 
cards. 

On  the  one  hand  the  great  addition  to  our  token 
money  endangers  the  gold  basis;  on  the  other,  the 
reserves,  even  with  the  addition  of  the  whole  issue 
of  tokens,  successfully  maintained  at  par  with  gold, 
cut  but  a  small  figure  when  confronted  with  the  cry 
for  the  cashing  of  i8  billions  of  money  of  account. 
And  the  money  of  account,  from  formerly  less  than 
ten  times,  is  now  growing  twenty  times  faster  than 
the  money  of  value ! 

With  the  collection  by  the  banks  of  all  the  gold  in 

'  Lombard  Street,  by  Walter  Bagehot,  chap,  i.,  p.  l8. 
*  See  Chap.  IV.,  Section  b. 


Totality  of  Money  System  in  U.  S.  163 

the  land,  except  that  held  by  the  Treasury,  and  the 
transfer  of  the  gold  to  the  reserve  banks  for  the  pur- 
pose of  obtaining  2)4.  times  its  amount  in  paper 
money,  the  cash  reserves  which  the  banks  are  re- 
quired to  maintain  in  their  own  vaults  and  which  by 
the  act  are  reduced  to  about  one  quarter  of  their 
former  proportion  to  demand  and  time  deposits,  will 
consist  entirely  of  the  tokens  which  accumulate  in 
the  banks  in  the  ordinary  routine  of  receiving  deposits 
of  currency  and  subsequently  paying  the  same  out 
again.  Deposits  will  have  lost  all  direct  connection 
with  gold,  but  must  perforce  have  indirect  relation  to 
it  on  account  of  the  value  relation  of  the  tokens  to  the 
gold.  This  indirect  relation  therefore  remains  highly 
important.  The  following  figures  show  the  enor- 
mously growing  disparity  between  money  of  account 
and  gold : 


Millions 

Individual  deposits,^  surplus,  and  profits  in  1913 

20,185 

"  1908 

15-031 

Increase 

5.154 

Gold  in  the  country^                                in  191 3 

1,897 

"  1908 

I>6i5 

Increase 

252 

The  increase  in  the  volume  of  individual  deposits, 
bank  surplus,  and  undivided  profits  since  1908  is 
seen  by  the  above  comparison  to  be  proceeding  at  a 

'  Comptroller,  1913,  pp.  44  and  45. 
'  Director  Mint,  19 13,  p.  62. 


i64  Capital  To-Day 

rate  twenty  times  greater  than  that  of  gold.  In  other 
words  against  every  dollar  gold  added  to  the  national 
supply  during  the  five  years  from  1908  to  19 13, 
there  have  been  created  twenty  dollars  in  money  of 
account,  aside  from  any  increase  of  the  latter  which 
may  be  hidden  from  view  by  the  issue  of  stock  divi- 
dends by  banks  against  their  accumulated  cash  prof- 
its. In  1908  the  increasing  gold  production  reached 
the  high-water  mark  and  has  since  remained  station- 
ary. Authorities  are  not  aware  of  any  new  sources 
from  which  an  additional  supply  might  be  expected 
in  the  future,  notwithstanding  the  fact  that  gold 
mining  is  a  profitable  industry. 

To  restate  the  matter  in  a  few  words :  every  dollar 
gold  is  expected  to  serve  as  a  guaranty  of  value  of 

(i)  $20  money  of  account; 

(2)  Any  possible  increase  in  the  ratio  in  which 
money  of  account  may  be  created  hereafter  as  com- 
pared with  any  increase  in  the  gold  supply ; 

(3)  $1  token  money; 

(4)  Any  addition  to  the  token  money  from  the 
operation  of  the  Federal  Reserve  Act  or  from  any 
further  issue  independent  of  that  act. 

In  other  words  the  entire  money  system  is  to  rest 
on  a  basis  of  gold  to  which  recent  development 
assigns  a  narrowness  of  4^4%  of  the  whole,  and  which 
is  subject  to  further  contraction  from  the  causes 
above  recapitulated. 

Between  the  Frankenstein  monster  of  its  bank 
account  on  one  side  and  the  gold  to  which  it  is  chained 
on  the  other  side  the  capitalist  class  is  indeed  con- 
fronted by  a  problem. 


Totality  of  Money  System  in  U.  S.  165 

In  thus  criticizing  adversely  the  Federal  Reserve 
Act,  we  are  far  from  impugning  the  motives  or 
questioning  the  ability  of  the  men  who  had  a  hand  in 
the  enactment  of  the  same.  It  is  perfectly  true  that 
the  old  monetary  system  was  inelastic,  but  only  so 
far  as  paper  tokens  were  concerned.  It  was  certainly 
not  more  inelastic  than  that  of  England,  where 
nevertheless  there  is  no  agitation  for  currency 
reform.  However,  it  would  not  be  correct  to  judge 
of  the  needs  of  one  country  by  those  of  another. 
It  is  equally  true  that  the  need  of  money  is  con- 
tinually growing  with  the  increasing  value  of  com- 
modities which  are  to  be  circulated ;  but  a  permanent 
augmentation  of  paper  money  is  not  stated  as  the 
object  of  the  act.  At  the  same  time  the  increase 
in  the  amount  of  money  of  account  goes  on  automati- 
cally, and  its  supply  is  always  equal  to  the  demand. 
It  is  only  a  matter  of  employing  more  clerks  at  the 
clearing  houses  to  double  the  amount  of  exchanges. 
But  the  sum  of  money  of  account  bears  a  relation  to 
the  sum  of  gold,  as  shown  in  the  preceding  chapter. 

The  need  of  additions  to  the  volume  of  money  is  a 
concomitance  of  the  growth  of  money  of  account. 
This  need  gold,  so  sorely  deficient,  is  unable  to  fill. 
Recourse  must  be  had  to  paper  money.  The  Federal 
Reserve  Act  will  provide  paper  money  on  a  more 
systematic  and  comprehensive  plan  than  the  previous 
expedient  of  the  Aldrich-Vreeland  emergency  cur- 
rency instituted  in  consequence  of  the  experiences  in 
the  panic  of  1907.  There  is  no  occasion,  and  there 
has  been  no  intention,  to  consider  the  act  from  the 
narrower  point  of  view  of  the  financier  who  must 


i66  Capital  To-Day 

necessarily  be  guided  in  his  actions  by  the  empirical 
conditions  he  has  to  meet  directly,  conditions  to 
which  he  is  subject  and  which  he  cannot  change. 
It  may  be  readily  admitted  that  nobody  could  have 
suggested  a  better  financial  measure  than  this  act. 
It  may  also  be  granted  that  the  members  of  the  Fed- 
eral Reserve  Board,  on  whom  will  rest  the  responsi- 
biHty  of  governing  the  new  system,  will  always  be 
men  of  the  highest  moral  and  professional  quahfica- 
tions.  Yet  the  Federal  Reserve  Act  must  fail  as  a 
solution  of  the  money  problem.  No  legislation 
can  reach  down  to  the  bottom  of  that  problem.  For 
in  the  stage  we  have  reached  in  social  integration 
man  is  not  master  of  his  economic  affairs.  They 
rule  him. 


CHAPTER  VIII 

the  cycle  of  industrial  capital 

Formula  : 

= (  p  )....C M 


(means  ol  production 
money  commodlty-j  ...  (productive  process)    COMMODITY  MONEY 

(labor  power 

Just  as  the  development  of  the  individual  animal 
from  the  cell  to  the  adult  represents,  more  or 
less  clearly,  the  story  of  the  origin  and  develop- 
ment of  the  species,  so  does  the  new  individual 
industrial  enterprise  repeat  the  origin  and  develop- 
ment of  its  species — the  capitalist  system  of  produc- 
tion. It  may  not  be  necessary  to  recall  here  that  the 
original  industrial  capital  was  derived  largely  from 
the  older  merchants'  capital  and  usury  capital,  no 
more  than  it  is  necessary  here  to  inquire  into  the 
origin  of  any  money  which  in  our  time  begins  its 
career  as  industrial  capital.  It  is  sufficient  to  know 
that  it  exists  and  appears  for  the  first  time  in  the 
chosen  sphere  of  production. 

Marx  divides  Industrial  Capital  into  the  following 
component  elements : 

(i)  Constant  Capital,  consisting  of  the  means  of 
production,    inanimate    things    which    cannot    of 

167 


i68  Capital  To-Day 

themselves  increase  in  value,  therefore  a  given 
or  constant  quantity ; 

(2)  Variable  Capital,  the  living  labor  power  which 
adds  value  to  the  product. 

Constant  Capital  he  subdivides  into: 

Circulating  or  Liquid  Constant  Capital,  such  as  raw 
materials  and  accessories;  whereof  the  value  is 
transferred  entirely  to  the  new  product; 

Fixed  Capital,  such  as  buildings,  machinery,  work 
animals,  whereof  only  the  wear  and  tear  is  trans- 
ferred to  the  value  of  the  product. 

Industrial  capital  in  the  course  of  its  function 
passes  through  the  following  stages  which  together 
are  called  its  cycle : 

m — c    money  transformed  into  commodities  (means  of 

production  and  labor  power). 
(p)        arrest  of  circulation  by  the  productive  process 
resulting  in  a  commodity  of  greater  value  than 
the  elements  of  its  production. 
C— M  COMMODITY  (of  increased  value)  transformed 
into  and  returning  as  MONEY  (including  the  in- 
crement) to  its  starting  point. 

The  value  added  to  a  commodity  during  the 
process  of  production  beyond  the  value  of  the  ele- 
ments which  entered  into  it  (labor  power,  liquid 
constant  capital,  and  wear  and  tear  of  fixed  capital) 
is  called  by  Marx,  Surplus  Value. 

It  is  not  within  the  purpose  of  this  work  to  restate 
with  even  approximate  adequacy  the  Marxian  analy- 
sis of  surplus  value.  The  same  bears  directly  on  the 
relations  of  capital  and  labor  which  have  not  under- 


The  Cycle  of  Industrial  Capital     169 

gone  any  material  change  since  Marx  formulated 
the  theory  of  surplus  value  on  the  groundwork  of  his 
theory  of  value.  The  significant  changes  since  his 
time  affect  directly  only  the  relations  of  the  capi- 
talists to  each  other;  although  indirectly  these 
changes  are  of  transcendent  interest  to  the  working 
class.  However,  an  understanding  of  the  theory  of 
surplus  value  is  indispensable  for  an  understanding 
of  the  complete  fabric  of  the  capitalist  system  of 
production.  For  the  sake  of  those  readers  who  are 
not  as  yet  familiar  with  Marx's  Capital,  the  following 
brief  outline  of  the  general  theory  is  inserted. 

We  have  seen  in  Chapter  II.  that  the  value  of 
commodities  is  determined  by  the  quantity  of  labor 
socially  necessary  to  produce  them.  Since  labor 
power  is  a  commodity,  its  value  on  the  market  is 
determined  by  the  same  factor,  in  other  words  by 
the  cost  of  its  perennial  production  or  reproduction. 
But  labor  power  differs  in  one  important  respect  from 
other  commodities  in  that  it  is  the  only  commodity 
which  during  its  consumption  (the  act  of  labor) 
replaces  the  consumed  value  besides  creating  addi- 
tional value.  Thus  while  the  capitalists  buy  labor 
power  at  its  exchange-value  based  on  part  of  a  work 
day,  they  enjoy  its  use-value  during  a  whole  work 
day.  For  that  part  of  the  working  time  which  is  in 
excess  of  the  necessary  work  time  (necessary  for  the 
reproduction  of  labor  power)  no  equivalent  is  paid 
to  the  worker.  The  increment  thus  accruing  to  the 
capitalists  in  the  value  of  the  product,  beyond  the 
value  of  the  elements  of  production,  is  surplus  value. 
The  rate  of  surplus  value  expresses  the  proportion 


170  Capital  To-Day 

which  the  surplus  value  created  bears  to  the  wages 
paid.  It  is  the  capitaUsts'  share  in  the  value  pro- 
duced by  labor,  as  measured  by  the  worker's  share. 

Profit  is  surplus  value  considered  in  its  relation 
to  the  capital  advanced  for  production.  The  rate  of 
profit  is  the  surplus  value,  as  measured  by  the  capital 
invested. 

The  surplus  value  produced  by  the  workers  in  any 
establishment  is  not  necessarily  equal  to  the  net 
profit  realized  by  that  establishment.  Its  net 
profit  is  generally  only  the  residue  of  the  surplus 
value  remaining  as  its  share,  after  having  relin- 
quished part  of  the  surplus  value  to  other  capitalists 
or  their  retainers  under  the  titles  of  merchants' 
profits,  interest,  rent,  premiums  of  insurance  against 
losses  caused  by  bankruptcy,  theft,  burglary,  exces- 
sive fire  risk,  etc.,  the  cost  of  advertisers,  lawyers, 
politicians,  and  judges,^  and  under  various  other 
forms.  But  the  total  profit  appropriated  by  the 
capitalist  class  equals  (though  not  entirely,  on 
account  of  constant  depreciations)  the  surplus  value 
surrendered  by  the  workers. 

The  proportion  of  the  actual  (not  nominal)  revenue 
of  the  workers  in  their  collectivity  to  the  revenue  of 
the  capitalists  in  their  collectivity  in  the  entire 
manufacturing  industry  of  the  United  States,  includ- 
ing in  the  revenue  of  the  capitalists  the  part  of  the 
surplus  value  paid  over  by  them  to  landowners  and 
retainers,  is  shown  in  figures  arrived  at  by  a  calcu- 
lation  based   on  the   United   States  Census  found 

'  Sec  W.  J.  Connolly's  scries  of  articles  in  Everybody  s  Magazine, 
1913,  "Big  Business  and  the  Bench." 


The  Cycle  of  Industrial  Capital     171 

on  pages  174-175.  These  figures  of  the  Census  are 
confirmed  by  a  similar  elaboration  of  statistics 
furnished  by  another  source,  the  New  Jersey  Bureau 
of  Statistics,  found  on  pages  183-184,  relative 
to  the  important  silk  industry  in  that  State.  This 
industry  is  of  undoubtedly  average  organic  com- 
position, that  is,  one  in  which  the  proportion  of  con- 
stant to  variable  capital  represents  the  average  of 
manufacturing  industries. 

That  some  people  are  aware  of  the  fact  that  the 
division  of  the  product  between  the  capitalist  and 
the  worker  is  effected  on  about  the  basis  deducible 
from  the  Census  figures  here  referred  to,  is  shown  by 
an  address  delivered  at  the  University  of  Maine 
commencement  in  the  spring  of  19 14  by  Mr.  Marshall, 
Vice-President  of  the  United  States,  in  which  this 
sentence  occurs : 

"Sixty  years  later  [from  1850]  the  proportion  had 
changed  to  less  than  one  fifth  to  labor  and  more 
than  four  fifths  to  capital." 

Previous  to  the  present  era  of  capitalist  produc- 
tion, during  that  of  simple  production  of  commodi- 
ties, the  worker  owned  his  tools,  with  which  he 
produced  some  special  kind  of  commodity  in  accord- 
ance with  the  historical  development  of  the  division 
of  labor.  His  wants,  however,  were  manifold,  and 
to  supply  the  same  he  exchanged  his  special  product, 
value  for  value,  with  his  various  equals.  In  this 
exchange  money  played  only  the  fleeting  r61e  of  first 
serving  as  a  measure  of  equivalence  and  then  to 
facilitate  the  exchange  of  one  product  into  various 
other  products  of  various  quantities,  as  required  at 


172  Capital  To-Day 

various  times  by  the  worker.  It  was  this  commodity 
which  circulated,  the  direct  substance  of  social 
alimentation  and  digestion,  not  money.  When  we 
say  money  did  not  circulate  during  pre-capitalist 
production  we  mean  that  its  movement  was  centri- 
fugal in  contrast  to  its  centripetal  movement  in  the 
capitalist  system  of  society.  In  the  latter,  money, 
after  describing  a  circle,  returns  to  its  starting  point 
augmented  by  profit.  On  the  contrary  when  our 
old  friend,  the  weaver,  had  realized  the  money  value 
of  his  linen,  he  started  some  of  the  money  traveling 
along  the  line  of  his  fellow-workers.  It  first  reached 
the  butcher,  then  the  baker,  then  the  candlestick 
maker,  and  ere  long  the  weaver  himself  was  in  the 
line  again,  not  on  account  of  anything  uncompleted 
in  his  previous  transaction,  but  for  the  purpose  of 
effecting  a  similar  metamorphosis  with  a  fresh  lot 
of  linen.  The  underlying  principle  of  that  system  of 
society  was  production  for  the  purpose  of  consump- 
tion.    Its  formula  was 


The  essence  of  the  circulation  was 


The  capitalist  mode  of  production  substitutes  for 
the  pre-capitaUst  formula  c — m — c  the  (abbreviated) 
formula 

m c M 

Capitalist  circulation  begins  with  money  and  ends 
with  more  monev. 


The  Cycle  of  Industrial  Capital     173 

Its  essence  is 

m M 

which  is  in  fact  the  formula  of  loan  capital  in  its 
modest  5  or  6%  sort  of  way. 

c — c       represents      different      qualities,      equal 

quantity. 
m — M    represents     identical    qualities,    unequal 

quantity. 

Profit  is  revealed  as  the  sole  motive  of  capitalist 
production. 

Money  was  a  fleeting  medium  in  c — m — c. 

Alas !  that  the  commodity  cannot  be  made  equally 
fleeting  in  m — c — M. 

The  ideal  is  m — M,  and  from  its  standpoint  pro- 
duction is  merely  an  unavoidable  evil.  And  it  is 
this  ideal  which  at  one  time  or  another  has  inspired 
every  capitalistic  nation  and  started  it  on  a  course 
of  mad  speculation. 

However,  the  capitalist  class  has  almost  overcome 
this  unavoidable  evil  by  the  development  of  the 
large  corporation.  Whereas  in  the  early  days  of 
capitalist  production,  the  individual  capitalist  per- 
formed a  conspicuous  function  in  the  system  of 
production  by  his  personal  command  of  labor,  that 
service  is  now  delegated  to  managers,  superinten- 
dents, engineers,  accountants,  etc.,  salaried  by  the 
corporation.  The  stockholders  do  not  as  much  as 
attend  the  annual  meeting  for  the  election  of  directors, 
contenting  themselves  with  depositing  in  their 
banks  the  dividend  checks  received  by  mail. 


174  Capital  To-Day 

This  is  by  no  means  the  first  time  in  history  that 
economic  evolution  deprived  an  originally  useful 
ruling  class  of  its  social  function.  The  early  feudal 
lord  performed  a  social  service  in  donning  his  armor 
to  defend  his  territory  and  its  population.  But 
his  descendants  were  relieved  of  this  hardship  and 
instead  of  armor  donned  velvet  coats  and  silken 
breeches  to  attend  court  functions,  none  the  less 
maintaining  their  claim  to  tithes  on  the  mere  ground 
of  their  ownership  of  the  means  of  production.  The 
French  Revolution  ended  the  purely  parasitic  exist- 
ence of  this  class. 


CALCULATION,  BASED  ON  UNITED  STATES  CENSUS,  OF 
PROPORTION  OF  WAGES  AND  SALARIES  TO  SURPLUS 
VALUE  ACCUMULATED  IN  THE  MANUFACTURING  IN- 
DUSTRIES IN  THE  YEAR  I904. 

(Unit — I  million  dollars) 
Value  of  manufactured  products  in  1904 

(13th  Census  of  the  United  States, 

1910,  V.  viii..  Manufactures,  p.  32) 14)794 

Cost  of  materials  (Census  of  Manufactures 

1905  part  i.,  p.  ci.): 

Raw  materials 8,059 

Accessories:    fuel,    mill    supplies,    oil, 

waste,    freight,   rent   of   power   and 

heat,  packing  boxes    and  wrapping 

paper 445 

Wear  and  tear :  values  given  in  Census 

of  Manufactures,  1905,  part  i.,  Tcible 

XV.,  p.   Ixv.,  as  land   980,  buildings 

1996,  machinery  3489.     Report  adds, 


The  Cycle  of  Industrial  Capital     175 

p.  Ixv:  "Rent  paid  for  land,  build- 
ings, and  machinery,  $73,267,209. 
If  this  gross  rent  were  capitalized 
at  8  per  cent.,  it  would  represent 
$915,840,112  as  the  value  of  rented 
property."  Machinery  included  in 
rent,  aside  from  some  power  ma- 
chinery, can  have  reference  only  to 
shoe  and  other  patented  machines, 
all  of  which  is  a  negligible  quantity. 
Separating  the  value  of  rented 
property  in  the  same  proportion  as 
owned,  we  arrive  at  totals: 
Land  1282 

Buildings     2610  2%  52 

Machinery  3489  (4  to 

10%,  say)  7%  244  296 

Taxes,  real  estate  and  general 
(13th  Census  U.  S.,  1910,  v. 
viii.,p.  129)  59      8,859 


Value  added  by  labor 5.935 

Divided   (Census    of    Manufactures 

1905,  part  i.,  table  xix.,  p.  Ixxi.) 

as  follows : 
Wages        5,470,321  workers      2,612 
Salaries         519.751  employees     575 


Total      5,990,072  54%     3,187 

Owners  of   216,180  estab- 
lishments 46%     2,748 


100%  5,935 


176  Capital  To-Day 

PROPORTION  OF  WAGES  AND  SALARIES  TO  TOTAL  SURPLUS 

VALUE 

Per  cent. 

Proportion  of    wages  and  salaries    to  product 

in  sphere  of  production 54 

Rent  of  dwelling,  in  proportion  to  wages  generally 

per  cent 25. 

less  maintenance  15%  of 

rent=  375 

less  profit  1.25     2.50 

"  depreciation  (off-set  by 
increase  in  land  value) 
' '  taxes  for  common  pur- 
poses I  of  rent  3.33 

5^ 

Net       19.17% 
of  revenue  of      54%       10 

balance  for  all  other  necessaries  of  life  44 

Profits  to  middlemen  50%  (see  below) ^ 

Ultimate  realization  by  workers  and  employees  of 

value  produced 22 

Total  surplus  value  retained  by  capitalists  of 

value  produced 78 

100% 

As  seen  on  the  preceding  page,  the  workers  consti- 
tute eleven  twelfths  of  the  persons  who  run  the  manu- 
factures. Of  the  consumption  of  the  workers  the 
New  York  State  Food  Investigating  Commission 
say  in  their  report  dated  August  i,  1912  (from 
which  also  all  the  following  facts  are  taken)  that  food 


The  Cycle  of  Industrial  Capital     177 

supplies  "make  up  from  40%  to  50%  of  the  entire 
budget  of  the  families  of  laboring  people.  There 
are  over  25,000  establishments  selling  food  products  " 
(in  New  York  City)  (p.  23),  "one  store  to  every 
250  persons"  (p.  7),  instead  of  "retail  stores  capable 
of  supplying  25,000  to  50,000  people  each"  (p.  33) 
in  properly  distributed  buildings  owned  by  the  city 
and  operated,  under  supervision  as  to  prices,  etc.,  of  a 
State  commission  on  markets,  by  one  corporation  at 
limited  profit  (p.  36).  At  present  "commission  men, 
receivers,  wholesalers,  jobbers,  speculators,  storage 
men,  retailers,  and  truckers  make  profits  or  charges 
against  the  stuff  which  aggregate  from  40%  to 
70%  of  the  amount  finally  paid  by  the  consumer" 
(P-  35)-  This  would  make  an  average  of  55%; 
adding  only  5%  profit  for  the  shipper  makes  to- 
tal 60%;  deducting  out  of  15%  expenses  claimed 
by  private  retail  markets  (p.  11)  10%  for  actual 
labor  (the  balance  being  rent)  leaves  net  profit  50%. 
There  are  certainly  further  expenses,  but  they  are 
largely  mere  waste. 

We  have  now  accounted  for  70%  (25%  rent  and 
45%  food)  of  the  worker's  wages.  The  balance  is 
largely  spent  for  manufactured  articles  sold  by 
retailers  in  the  poorer  quarters  at  higher  prices  than 
charged  by  the  large  stores  in  the  department  store 
districts.  In  assuming  50%  profit  on  all  of  a  worker 's 
purchases,  such  a  rate  seems  reasonable,  if  one  con- 
siders further  the  smallness  of  purchases  (coal  by  the 
pail,  etc.),  poor  quality,  adulteration,  and  cheating 
in  weights  and  measures. 

Merely  by  way  of  comparison  with  the  above 


178  Capital  To-Day 

figures  of  the  New  York  State  Commission  we 
abstract  from  the  Report  of  the  Secretary  of  Agricul- 
ture of  191  o  the  following  percentages  of  increase 
of  prices  to  consumers  over  cost  (pp.  24  and  25) : 

Cabbage  135%  by  the  head  over  farm  price 
Onions     260%  "     "     peck     "       " 
Oranges  400%  "     "     dozen  "       " 
Coffee      150    to  337>^%  over  import     " 

Cost     7.80  cents 

Freight  0.28  " 

Total    8.08  cents  per  lb.,  sold  at  20  to  35  cents 
per  lb. 
Tea         2i2>^  to  337 H%  over  import  price 

Cost  16  cents,  sold  50  to  75  cents  per  lb. 

The  extent  to  which  freights  (themselves  impreg- 
nated with  profits)  enter  into  cost  of  domestic 
products  is  estimated  by  the  Secretary  on  farm 
prices  as  low  as : 

0.9%  on  butter  (factory  price) 


1.3% 
4-5% 
4-8% 
5-  % 
13-6% 
14-8% 


eggs 

live  poultry 

beans 

sweet  potatoes 

apples 

potatoes 


The  Cycle  of  Industrial  Capital      179 

COMPARISON    OF    TOTAL    SURPLUS    VALUE    TO    VALUE    OF 

MANUFACTURING  PLANT 

Unit 

I  million 

dollars 

Value  added  in  1904  by  workers  and  employees . . .     5,935 

Wages  and  Salaries   in  manufacturing   industry 

3,187    reduced    by    rent    and    surplus    value 

accumulated    in    sphere    of    circulation    from 

54%  to  22%,  or 1,298 

Total  surplus  value  in  1 2  months,  1904 4,637 

Surplus  value  per  month 386 

RESULT 

Value  of  buildings  in  1904  (p.  175) 2,610 

Value  machinery  in  1904  (p.  175.) 3489 

Total  value  of  plant 6,099 

Surplus  value  for  15.8  months  at  386  per  month.. .     6,099 

DIVISION  OF  LABOR  TIME  BASED  ON  TO  HOUR  DAY 

Necessary  labor  time     22%     2  hours     12  minutes 
Surplus  "        "        78%     7       "         48       " 

Another  striking  fact  in  the  United  States  Cen- 
sus figures  here  presented  is  the  relatively  large 
number  of  salaried  employees  to  that  of  the  wage 
workers,  their  numbers  being  respectively  519,751 
and  5,470,321,  or  nearly  one  employee  to  every  ten 
workers. 

Nevertheless  this  proportion  has  since  become 
even  more  unfavorable,  for  according  to  the  Census 


i8o  Capital  To-Day 

of  1909,  that  is  within  a  term  of  five  years,  their 
numbers  increased : 

Employees  to  790,267  or  52%  over  1904 
Workers  to  6,615,046  or  21%     "       " 

The  percentage  of  employees  increased  two  and  one 
half  times  as  much  as  the  workers. 

This  is  a  perfectly  natural  phenomenon.  Produc- 
tion on  an  enlarged  scale  is  accompanied  by  technical 
improvements  increasing  the  mass  of  products 
turned  out  by  the  existing  army  of  workers,  and 
while  the  latter  has  nevertheless  increased  at  the 
rate  of  4%  annually,  the  number  of  persons  required 
to  handle,  sell,  and  account  for  the  increased  mass  of 
products  has  increased  at  the  rate  of  10%  annually, 
so  that  in  1909  the  proportion  of  employees  to  workers 
was  as  I  to  8. 

In  our  calculation  we  have  made  no  distinction 
between  workers  and  employees  for  the  following 
reasons : 

The  class  of  employees  may  be  generally  divided 
into  two  sections. 

One  is  composed  of  the  hierarchy  of  factory  organi- 
zation (managers,  superintendents,  foremen),  engi- 
neers, chemists,  bookkeepers  and  clerks.  These 
would  be  just  as  necessary  in  any  other  than  a 
capitalist  system  of  production,  for  instance  in  a 
system  of  associated  labor.  Therefore  while  not 
directly  productive  through  the  performance  of 
manual  labor,  these  people  are  indirectly  productive 
equally  with  the  workers  themselves. 

It  is  true  that  the  salaries  paid  to  some  of  the 


The  Cycle  of  Industrial  Capital      i8i 

employees  are  enormous  compared  to  common  wages, 
and  that  the  average  remuneration  for  the  whole 
class  of  employees  is  materially  higher  than  for  the 
working  class.  This  is  because  the  work  of  the 
salaried  class  is  considered  complicated  labor,  or  a 
multiple  of  common  labor,  to  which  matter  we  have 
referred  already  in  Chapter  II. 

Salaries  are  regulated  by  the  market  price,  like 
wages,  although  the  price  fluctuations  of  the  former, 
or  the  deviations  from  value,  are  greater  than  those 
of  wages.  This  greater  irregularity,  as  well  as  the 
high  level  of  many  salaries,  is  due  to  our  manner  of 
producing  the  higher  capacities.  Suppose  that  by 
some  freak  of  fate  we  had  never  invented  a  con- 
trivance for  making  pins  otherwise  than  by  hand; 
evidently  pins  would  then  be  expensive  compared 
with  other  goods.  This  is  precisely  what  our  social 
system  (which  also  determines  the  degree  of  general 
education  we  can  afford  to  give)  is  doing:  it  manu- 
factures unskilled  labor  more  and  more,  as  it  were, 
by  machine  (for  the  machine)  and  the  skilled  workers 
by  hand.  Technicians,  like  hand-made  commodi- 
ties, represent  a  greater  quantum  of  social  endeavor 
or  labor  time  than  machine-made  workers.  Ger- 
many, which  is  ahead  of  the  United  States  in  technical 
and  educational  matters,  has  by  its  technical  and 
trade  schools  reached  the  transition  from  hand  to 
machine  industry  in  the  making  of  skilled  workers, 
and  for  a  number  of  years  we  hear  much  of  its  edu- 
cated proletariat.  The  exchange- value  of  the 
technical  profession  must  be  declining. 

The  other  section  of  the  class  of  employees  has  no 


1 82  Capital  To-Day 

connection  with  the  sphere  of  production  and  belongs 
to  that  of  circulation.  This  is  mainly  composed 
of  salesmen  whose  activity  adds  no  value  to  the 
product.  Their  usefulness  consists  in  realizing  for 
the  capitalists  the  surplus  value  contained  in  the 
commodities,  on  which  realization  the  whole  capitalist 
system  is  conditioned.  Not  only  do  they  realize 
the  surplus  value  but  the  labor  time  and  salary  of 
every  one  of  them  leaves  a  profit  to  his  employer. 

Inasmuch  as  this  class  is  an  indispensable  adjunct 
to  the  existing  system  and  is  itself  exploited,  it  is 
included  in  the  class  of  productive  agents  in  our 
presentation  of  the  Census  figures.  Under  conditions 
as  they  are  the  most  modest  drummer  and  the  hun- 
dred-thousand-a-year  electrician  Steinmetz  must  be 
assumed  to  perform  social  service  in  proportion  to 
their  respective  remunerations.  And  therein  Hes 
the  difference  between  them  and  the  capitalist 
owning  paper  titles  to  income  or  the  landlord  owning 
real  estate  of  which  the  ground  rent  swells  by  the 
mere  birth  of  children  to  other  people.  These  gentry 
perform  no  function. 

Viewing,  however,  the  activity  of  salesmen  from 
the  standpoint  of  a  higher  social  organization,  it 
must  be  considered  as  social  waste,  and  their  share 
in  the  income  of  the  class  of  employees  represents  a 
deduction  from  the  22%  of  the  social  product 
falling  to  the  productive  agents. 


The  Cycle  of  Industrial  Capital      183 

CALCULATION,  BASED  ON  THIRTY-FOURTH  ANNUAL  REPORT 
(191 1)  OF  THE  BUREAU  OF  STATISTICS  OF  NEW  JER- 
SEY, OF  PROPORTION  OF  WAGES  AND  SALARIES  TO 
SURPLUS  VALUE  ACCUMULATED  IN  THE  SILK  INDUS- 
TRY IN  THE  YEAR  I9IO. 

Value  of  manufactured  broad  silks  and  rib- 
bons (p.  16) $52,572,837 

Materials:  raw,  oils,  fuel, 
waste,  packing  cases,  light- 
ing, etc.  (p.  40) $29,115,893 

Depreciation:  land  and  build- 
ings   owned    by    establish- 
ments   (p.    38),  $4,733,819- 
Adding     value     of     rented 
property  and  separating  lands 
and    buildings    by    method 
used  on  United    States  Cen- 
sus calculation,  result  is: 
Land,  $2,039,000 
Buildings,  very  solid 
$4,151,000  @  1%       $41,510 
Machinery    (p.    38), 
10,210,675     @    7%      $714,747 

756,257 
Taxes  on  real  estate  and  general, 

estimated  200,000 

30,072,150 

Value  added  by  labor $22,500,687 

Divided  as  follows : 
Salaries  not  reported;    U. 

S.     Census     191  o,     vol. 

viii.,  p.  771,  gives  for  N. 

J.   as  of  Dec.    15,    1909, 


i84  Capital  To-Day 

silk  employees  1774,  sala- 
ries   $2,317,000.     Allow- 
ing six  months  increase 
for     average     of     1910 
makes 

1,814    em- 
ployees $  2,364,000 
Wages  (p.  76)  21,745  workers  10,526,801 

Total  23,559    57%      12,890,801 
Surplus  value  43%        9,609,886  $22,500,687 


TOTAL  RATE  OF  EXPLOITATION 

Assuming  the  value  per  yard  to  be  $1.00  and  the 
figures  of  the  Bureau  accordingly  to  stand  for  yards 
instead  of  dollars,  it  is  plain  that  after  30,072,150 
yards  are  sold  and  have  replaced  the  consumed 
capital,  fixed  as  well  as  liquid,  the  remaining  22,500,- 
687  yards  are  to  be  divided 

12,890,801  yards  to  the  workers  and  salaried  employees 
9,609,886     "        "     "   manufacturers. 

But  instead  of  each  worker  taking  his  quota  of 
yards  silk  in  natura,  we  can  view  him  as  then  and 
there  selling  it  to  the  manufacturers  at  the  factory 
price  of  a  yard  for  a  dollar  and  with  the  money 
(after  paying  his  rent)  buying  the  necessaries  of  life 
at  the  retail  price.  The  difference  between  the 
factory  prices  at  which  the  working  class  sell  their 
share  in  the  product  to  the  capitalist  class  and  the 
retail  prices  at  which  they  buy  back  the  same  from 
the  capitalist  class,  allowing  however  for  the  necessary 


The  Cycle  of  Industrial  Capital      185 

circulation  cost,  as  freight,  storage,  etc.,  is  the  further 
surplus  value  collected  by  the  landlords  and  by  the 
capitalists  in  the  sphere  of  circulation,  in  addition 
to  the  surplus  value  collected  by  the  capitalists  in 
the  sphere  of  production,  as  shown  in  the  calculation 
of  "Proportion  of  Wages  and  Salaries  to  Total 
Surplus  Value"  (p.  176). 


CHAPTER  IX 

THE    MYSTERY    OF    CAPITALISM 

In  the  preceding  chapter  the  cycle  of  industrial 
capital  as  a  whole  has  been  depicted  as  starting 
on  its  career  and  completing  its  first  turn,  the  same 
as  any  individual  capital  in  a  new  sphere  of  enter- 
prise may  be  seen  to  do  any  day.  The  beginning 
and  the  completion  of  the  turn  have  shown  the 
motive  which  is  expressed  in  the  formula  m — c — M. 
The  money  capital  invested  does  not,  however,  pass 
simultaneously  in  its  entirety  through  the  successive 
phases  of  the  cycle,  but  in  due  course  portions  of  the 
capital  may  be  found  in  all  the  different  phases  at 
the  same  time,  especially  with  the  repetition  of  the 
turns,  in  other  words  with  reproduction. 

Of  course,  when  a  wheel  is  actually  revolving  any 
point  is  as  much  the  beginning  as  any  other,  and  what 
had  been  fixed  in  the  formula  as  the  beginning 
becomes  a  mere  point  of  passage  like  all  the  others. 
Then  we  are  in  a  position  to  exercise  freedom  of 
choice  for  looking  upon  any  other  point  on  the  wheel 
as  the  beginning.  For  instance  our  good  friends, 
the  political  economists,  prefer  to  represent  the  pro- 
ductive process  (.  .  .  p.  .  .  )  as  the  beginning  of  the 
story.     Certainly  such  a  view  of  the  matter  has  its  ad- 

l86 


The  Mystery  of  Capitalism  187 

vantages.  It  throws  at  once  into  relief  the  fact  that 
the  object  of  the  captains  of  industry  is  really  the  pro- 
duction of  the  necessaries  of  life  for  mankind,  probably 
supplying  them  as  cheaply  and  as  plentifully  as 
possible.  As  soon  as  we  gain  a  good  realization 
of  this  view,  we  comprehend  readily  that  circula- 
tion is  in  our  day  not  different  from  former  times,  it  is 
always  c — m — c,  production  for  the  sake  of  consump- 
tion. We  shall  also  have  no  suspicion  that  the 
technical  revolution  in  the  instruments  of  production 
during  the  last  two  centuries  has  brought  about  a 
revolution  in  the  division  of  the  classes  by  con- 
centrating the  ownership  of  the  new  instruments  of 
production  in  the  hands  of  the  new  capitalist  class 
and  divorcing  the  workers  from  their  antiquated 
tools,  thus  subordinating  them  as  the  wage-working 
class  in  the  new  capitalist  order  of  society.  We 
shall  further  be  saved  the  racking  of  our  brains  in 
trying  to  understand  that  c — m — c,  a  relation  of 
social  equality,  has  been  superseded  by  m — c — M, 
production  for  the  sake  of  profit,  a  relation  of  social 
inequality. 

That  the  laudable  zeal  of  the  capitalists  to  provide 
mankind  with  the  necessaries  of  life,  and  even  with 
luxuries,  carries  with  it  its  own  recompense  by  en- 
riching them,  it  would  be  of  course  impracticable 
to  deny.  The  national  wealth  is  in  their  custody, 
without  check  and  without  bond,  a  condition  said 
to  have  been  described  by  the  late  lamented  President 
Baer  of  the  Reading  Co.,  leader  of  the  anthracite 
trust  and  Morgan  satellite,  in  a  letter  to  a  Wilkes- 
barre  minister  referring  to  "the  Christian  men  to 


1 88  Capital  To-Day 

whom  God  in  His  infinite  wisdom  has  given  the 
control  of  the  property  interests  of  the  country." 
On  the  other  side  the  wage-workers,  as  we  already 
had  occasion  to  notice,  are  practically  penniless. 
Political  economy  deals  only  with  wealth,  not  with 
poverty;  the  representatives  of  the  latter,  therefore, 
do  not  count,  a  fact  wittily  reflected  by  George 
Bernard  Shaw  in  a  letter  to  a  New  York  gentleman 
who  had  requested  an  appointment:  "I  shall  not 
be  in  London  at  that  time.  In  fact  nobody  stays 
in  London  during  the  summer,  except  a  few  million 
cockneys." 

Now,  what  is  the  source  of  the  wealth?  Any 
child  knows  enough  to  answer  that  it  is  an  accumula- 
tion of  profits.  But  just  how  do  the  profits  originate? 
On  this  point  the  political  economists  disagree,  and 
their  disagreements  should  impress  us  with  their 
originality  and  independence  of  thinking.  On  the 
other  hand  they  thereby  expose  themselves  to  the 
reproach  that  their  methods  are  philosophic,  not 
scientific,  for  no  science  offers  opposing  theories, 
differences  among  scientists  existing  only  during 
the  stage  of  hypothesis.  Time  was  when  political 
economy  bid  fair  to  develop  into  a  real  science ;  that 
was  in  the  days  of  the  classics  Petty,  Smith,  and 
Ricardo,  whose  vision  was  of  course  limited  by  the 
empirical  conditions  of  their  time  and  by  the  lack  of 
the  theory  of  understanding,  given  to  the  world 
later  by  Dietzgen  and  which  we  have  already  out- 
lined. But  historical  development  atrophied  the 
nascent  science.  The  awakened  realization  by  the 
workers  that  they  constituted  a  distinct  class,  having 


The  Mystery  of  Capitalism  189 

common  interests  opposed  to  those  of  the  capitaUst 
class,  and  the  class  struggle  to  which  this  realization 
gave  rise,  paralyzed  a  science  having  for  its  theme 
the  laws  governing  the  economic  relations  of  the 
warring  classes.  The  frank  investigator  of  the 
youthful  days  of  capitalist  society  degenerated  into 
the  latter-day  professor,  who  no  longer  searches  for 
truth,  but  for  lawyer's  arguments  in  conducting  a 
defense. 

So  instead  of  unity  through  scientific  methods 
which  would  be  fatal  to  the  defense,  we  find  among 
the  political  economists  conflicting  philosophic  views 
as  to  the  best  way  of  conducting  the  defense,  each 
professor  adding  some  immaterial  frill  of  his  own 
which  in  his  estimation  grows  to  the  importance  of 
the  saving  thought.  Essentially  they  have  only 
tv/o  ways  of  accounting  for  profit:  one  is  that  it 
originates  in  the  productive  process  in  a  manner  too 
mysterious  and  contradictory  to  permit  of  a  clear-cut 
analysis,  while  the  other  attributes  it  entirely  to  the 
sphere  of  circulation,  as  a  phenomenon  accompanying 
the  sale  of  the  product. 

Let  us  first  dispose  of  the  latter  explanation. 
Here  the  postulate  is  that  the  value  of  the  product 
cannot  be  larger  than  the  value  of  the  capital  which 
had  gone  into  and  has  been  consumed  in  the  produc- 
tive process,  all  the  elements  of  production  (including 
of  course  labor)  having  been  paid  for  at  their  full 
value  and  the  addition  of  the  value  of  these  elements 
constituting  the  value  of  the  new  product.  In 
other  words,  the  capitalists  sell  to  each  other  their 
products  (raw,  partly  manufactured,  and  accessory 


190  Capital  To-Day 

materials,  buildings,  machinery,  and  articles  of 
individual  consumption)  above  their  value  by  adding 
a  profit. 

When  Robert  and  Bertram,  the  merry  vagabonds, 
met  again  after  a  long  interval  and  in  the  exuberance 
of  their  feelings  embraced  each  other,  each  improved 
the  occasion  by  deftly  abstracting  the  other's  hand- 
kerchief. It  is  impossible  to  see  how  these  worthies, 
by  cheating  each  other,  increased  the  value  of  the 
stock  of  handkerchiefs  one  particle.  If  only  one 
had  been  successful,  the  result  for  them  as  a  class 
would  have  been  the  same — what  one  gained  the 
other  lost.  As  a  class  they  could  not  grow  richer 
except  at  the  expense  of  those  outside  their  class. 

But,  it  is  maintained,  the  value  of  a  commodity  is 
less  in  the  hands  of  the  producers,  than  in  those  of 
the  consumers  (in  which  are  included  the  capitalists 
in  their  capacity  as  productive  consumers).  The 
fact  of  the  matter  is  that  the  producer  does  not  look 
on  his  commodity  as  a  use-value  to  himself;  it  is  to 
be  realized  as  such  only  by  the  consumer,  productive 
or  individual,  who  acquires  its  use-value  by  paying 
for  its  exchange-value.  He  does  not  pay  twice  for 
the  commodity,  first  for  its  exchange-value  and  then 
something  extra  for  its  use-value. 

This  doctrine  aims  to  steer  clear  of  a  discussion 
of  the  part  played  by  labor  in  the  creation  of  value 
and  therefore  of  surplus  value  or  profit.  The  inten- 
tion is  good ;  it  is  better  this  discussion  were  avoided. 
But  the  road  to  perdition  is  paved  with  good  inten- 
tions. What  if  the  workers  should  seize  this  doctrine 
and  say : 


The  Mystery  of  Capitalism  191 

Things  seem  to  be  fixed  so  that  everyone  can  make  a 
profit  on  the  commodities  he  sells,  except  us  who,  do 
what  we  may,  must  sell  our  only  commodity,  our  labor 
power,  at  the  cost  of  production.  We  want  the  rules  of 
the  game  changed  so  that  we  are  the  exception  no  longer. 
We  want  some  of  the  smart  men  on  our  side  to  find  out 
what  is  the  proper  profit  of  labor,  and  if  they  come  to  the 
conclusion  that  this  adding  a  profit  all  around  is  only 
tomfoolery  we  will  abolish  the  whole  profit  system  for 
you  and  for  us. 

Such  language,  we  all  agree,  would  not  be  elegant; 
for  our  own  part  we  might  add  that  the  demands 
would  not  thus  be  stated  with  scientific  correctness, 
but  they  certainly  would  be  dangerous  to  our  social 
system. 

Indeed,  something  resembling  this  idea,  but  with- 
out the  formulation  of  any  demand,  privately,  so  to 
say,  has  been  carried  out  by  the  English,  Belgian, 
and  German  cooperative  societies.  The  first  men- 
tioned do  five  hundred  and  fifty  million  dollars'  worth 
of  business  annually^  and  these  associated  workers 
employ  as  salaried  managers,  etc.,  many  a  former 
employer  of  theirs. 

We  can  now  turn  our  attention  to  the  principal 
strain  of  political  economists,  that  which  leaves  the 
question  of  profits  in  a  mystic  haze.  Since  Adam 
Smith  there  has  been  no  progress  in  the  science  of 
which  he  is  called  the  father,  but  his  candor  and 
repose  have  been  replaced  by  very  active  wriggling 
and  dodging  on  the  part  of  the  present-day  profes- 

'  Socialism  and  Democracy  in  Europe,  by  S.  P.  Orth,  Professor  of 
Politics,  Cornell  University,  p.  218. 


192  Capital  To-Day 

sors,  a  concomitant  of  the  changed  psychology  of  the 
working  class.  It  will  therefore  be  more  direct  and 
useful  to  follow  Smith's  thoughts,  rather  than  the 
gymnastics  of  the  exponents  of  economics  in  its 
period  of  degeneration. 

If  the  capitalist  cycle  begins  with  ...  p  ...  we 
must  perforce  presuppose  the  entrance  into  it  of  some- 
thing. What  was  it  ?  From  the  standpoint  of  the  capi- 
talist (and  there  is  no  other  standpoint,  as  we  shall 
see  presently)  it  was  a  certain  value  of  capital  in  di- 
vers forms.  One  of  these  forms  is  human  labor.  But 
the  capitalist  has  not  bought  the  laborer  as  a  slave. 
Also  the  laborer  is  not  a  capitalist ;  he  has  a  commodity 
to  sell,  but  that  becomes  capital  (the  means  of  produc- 
ing surplus  value)  only  in  the  hands  of  the  capitalist ; 
it  is  not  capital  while  owned  by  the  laborer.  He 
cannot  be  made  to  fit  as  a  man  into  a  system  which 
expresses  itself  in  terms  of  capital.  What  capital 
then  do  wages  represent?  Why  that  part  of  the 
circulating  capital  of  the  nation  necessary  to  the 
keep  of  the  laborer,  exactly  as  of  working  animals. 
Smith  expresses  this  result  in  Wealth  of  Nations, 
book  ii.,  chap,  v.,  p.  279:  "Not  only  his  laboring 
servants,  but  his  laboring  cattle,  are  productive 
laborers" — and  again  in  book  i.,  chap,  vi.,  p.  38: 
"In  the  price  of  corn,  for  example,  one  part  pays 
the  rent  of  the  landlord,  another  pays  the  wages  or 
maintenance  of  the  laborer  and  laboring  cattle 
employed  in  producing  it." 

This  analogy  of  the  wages  of  laborers  and  of  the 
wages  of  cattle  was  as  far  as  the  empirical  conditions 
of  his  time  permitted  Smith  to  see.     In  making  it, 


The  Mystery  of  Capitalism  193 

he  was  under  no  restraint  by  consideration  of  polite- 
ness or  expedience;  his  book  was  not  written  for  the 
workers,  who  could  then  neither  read  nor  write.  His 
placing  the  laborer  and  the  laboring  cattle  on  the 
same  level  cannot  fail  to  attract  our  attention  to  the 
points  of  similarity  between  the  economic  conditions 
of  the  different  workers,  the  slave,  the  wage-worker, 
and  the  animal.  The  slave  thinks  he  is  not  paid  at 
all  for  his  labor;  he  has  no  opportunity  to  make  a 
comparison  between  the  meal  set  before  him  and  that 
with  which  Jack  London's  "People  of  the  Abyss" 
have  to  get  along.  The  wage-worker  thinks  he  is 
paid  the  full  value  of  his  labor.  That  they  are  all 
partly  paid  is  concealed  in  one  case  by  the  relation  of 
ownership  and  in  the  other  by  the  money  relation. 
The  situation  was  really  only  clear  to  the  feudal  serf 
who  Vv^orked  a  number  of  days  on  his  own  land,  and 
a  number  of  days  on  his  lord's,  without  pay. 

In  Smith's  time  the  workers  had  no  conception  of 
their  human  dignity  or  of  having  any  rights.  It  could 
not  be  expected  of  him  to  analyze  economic  issues 
which  had  not  yet  arisen.  Our  ideas  and  concepts 
are  the  reflection  of  the  material  conditions  surround- 
ing us.  A  remarkable  illustration  of  this  profound 
truth  is  given  by  Marx  in  the  case  of  Aristotle,  the 
greatest  thinker  of  antiquity,  who  started  to  analyze 
why  commodities  exchange  with  each  other  or  with 
money  in  given  proportions.  Exchange,  he  saw,  is 
conditioned  on  commensurability,  and  this  on 
qualitative  alikeness.  Here  the  great  man  threw 
up  his  hands;  he  was  unable  to  penetrate  to  a 
definition  of  value  of  which  the  secret  is  the  concep- 
13 


194  Capital  To-Day 

tion  of  the  equivalence  of  human  labor,  of  human 
equality.  But  Greek  society  was  based  on  inequal- 
ity, on  slave  labor;  nothing  different  was  conceivable, 
— it  was  the  "natural"  order,  just  as  to  Smith 
production  and  capitalist  production  were  synony- 
mous, his  "natural"  order. 

Inquiry  into  the  question  whether  the  worker's 
sustenance  was  really  one  of  the  elements  which  en- 
tered the  productive  process  ( .  .  .  p  .  .  . ) ,  or  whether 
it  was  not  rather  the  worker  himself,  whose  Hving 
labor  power,  the  active  element,  entered  that  process 
in  a  different  manner  from  the  dead  means  of  pro- 
duction, the  passive  element,  was  reserved  for  a  later 
time,  when  capitalism  had  accomplished  the  con- 
centration of  the  population  in  cities  and  of  the 
rather  isolated  workers  into  mass  employment, 
thereby  awakening  their  consciousness  of  class  in- 
terests. Das  Kapital  appeared  ninety-one  years 
after  Wealth  of  Nations. 

As  soon  as  the  solution  had  been  found  that  it  was 
the  worker's  necessaries  of  life  which  entered  .  .  .  p  .  .  . 
and  in  precisely  the  same  way  as  the  other  elements 
of  production,  it  was  clear  that  the  profit  arises  from 
all  of  them  indiscriminately.  They  are  now  all 
elements  of  capital,  and  the  commodity  is  the  product 
of  capital,  not  of  labor.  No  longer  is  labor  the  source 
of  value,  but  capital.  Where  labor  has  been  buried, 
there  now  hovers  a  mystery. 

When  particularly  capable  workers  had  developed 
into  industrial  capitaUsts,  or  existing  mercantile 
capitaUsts  had  entered  the  field  of  production,  the 
new  methods  employed,  first,  of  division  of  labor, 


The  Mystery  of  Capitalism  195 

subsequently  of  machinery,  lessened  the  labor 
necessary  for  the  production  of  commodities  and 
thereby  their  value.  But  the  new  commanders  of 
industry  did  not  originally  sell  their  products  at 
their  reduced  value.  The  capitalistic  pioneers  in 
any  particular  industry  were  able  to  dispose  easily 
of  their  production  by  selling  but  slightly  under  the 
prices  of  the  independent  workers,  pocketing  the 
extra  profit  and  accumulating  additional  capital  to 
be  employed  in  forcing  the  former  free  workers, 
whose  ground  was  cut  from  under  their  feet,  into  the 
new  class  of  industrial  wage- workers.  The  extension 
of  the  capitalist  mode  of  production  in  time,  however, 
sharpened  the  competition  between  the  capitalists 
and  brought  down  the  pioneer's  profit  rates  to  a 
general  or  average  level  in  any  given  industry.  A 
new  capital  seeking  investment  would  then  only  be 
interested  in  ascertaining  in  which  trade  or  industry 
the  returns  promised  to  be  highest  for  the  amount  of 
capital  to  be  invested.  Also  capital  in  a  less  re- 
munerative sphere  might  be  transferred  to  a  more 
profitable  one, — a  transfer  effected  without  much 
difficulty  by  that  part  of  the  industrial  capital  which 
governs  the  process  of  circulation,  the  mercantile 
capital.  This  competition  for  the  best  spheres  of  in- 
vestment, withholding  capital  from  those  yielding  in- 
ferior returns  and  exerting  pressure  on  those  yielding 
higher  returns,  results  in  the  establishment  of  a  general 
or  average  rate  of  profit  for  all  industrial  capital 
whether  functioning  in  production  or  in  circulation. 
The  profit  to  be  derived  from  every  hundred  of 
money  in  a  definite  period,   say  annually,   is  the 


196  Capital  To-Day 

controlling  social  fact  which  supersedes  all  individual 
differences  entering  into  the  determination  of  com- 
modity prices,  such  as  rates  of  surplus  value,  lengths 
of  turn-over,  etc.  Not  only  those  elements  of  any 
capital  which  enter  into  the  constituency  of  prices, 
such  as  material,  wages,  and  wear  and  tear  of  fixed 
capital,  but  also  those  elements  of  capital  which  do 
not  so  enter,  as  the  unconsumed  part  of  the  fixed 
capital,  are  entitled  to  the  average  profit  rate.  Under 
this  rate  the  profit  accruing  to  each  individual  capital 
investment  is  added  to  the  cost  of  production  by 
the  rule  of  percentage.  It  is  in  practical  effect  the 
same  as  if  the  capitalist  class  constituted  a  joint- 
stock  company  which  divides  the  total  surplus 
value  extracted  from  the  working  class  according  to 
the  number  of  shares  each  capitalist  holds,  and  not 
according  to  the  quantity  of  surplus  value  extracted 
by  particular  industries.  The  loose  organization 
of  this  stock  company  permits  the  making  of  extra 
profits  by  individual  capitalists  through  superior  abil- 
ity or  unscrupulousness  or  luck,  but  the  total  surplus 
value  appropriated  by  the  company  equals  the  total 
dividend,  and  if  some  capitalists  collect  more  than 
the  average  rate  of  profit,  which  forms  the  working 
basis  of  the  system,  others  must  be  collecting  less 
than  the  average  rate. 

Now  let  us  see  the  results  of  capitalistic  price 
fixing.  In  the  following  little  table  it  is  assumed 
that  the  rate  of  surplus  value  is  100%  (that  is  in  a 
10  hour  day,  5  hours  reproduce  the  wages  and  5  hours 
are  unpaid  labor)  and  that  the  rate  of  profit  added 
to  the  cost  price  of  the  commodity  is  20% : 


The  Mystery  of  Capitalism  197 


Consitmcd 
capital 

Wages 

Surplus 
value 

Value  of 
articles 

Capitalist's 
prices 

95 
80 

65 

5 
20 

35 

5 
20 

35 

105 
120 

135 

120 
120 
120 

Some  of  these  articles  may  enter  a  further  process  of 
manufacture  as  materials  and  at  their  false  price 
falsify  from  the  start  the  value  of  the  new  product. 
It  is  impossible  in  capitalist  society  that  products  be 
exchanged  at  their  value ;  to  so  exchange  them  would 
result  in  very  different  profit  rates,  a  condition 
inimical  to  the  capitalist  bottom  principle  of  free 
competition. 

The  fact  that  competition  has  been  largely  elimi- 
nated during  the  last  quarter  of  a  century,  especially 
in  the  sphere  of  production,  resulting  in  an  increase 
of  economic  power  of  the  capitalists,  appears  like 
a  denial  of  competition  as  a  life  principle  of  capitalism. 
But  the  logical  result  of  competition  is  the  survival 
of  a  small  number  of  the  strongest  who  may  continue 
the  warfare  between  themselves  or  combine.  The 
process  shows  the  revolutionary  nature  of  capitalism, 
which  is  condemned  to  undermine  its  own  foundation. 
The  degree  of  concentration  in  trusts,  a  matter  to 
which  we  shall  devote  more  detailed  attention  further 
on,  the  same  as  the  status  of  money,  the  supreme 
Thing  which  rules  the  whole  fabric  of  capitalist  soci- 
ety, indicate  how  far  the  evolution  of  capitalism  has 


198  Capital  To-Day 

progressed.  We  can  foresee  the  eventual  concentra- 
tion of  the  still  competitive  industries;  we  can  also 
conceive  of  the  power  of  indirect  taxation  of  the 
people,  now  exercised  by  the  individual  trusts,  being 
held  in  check  by  a  controlling  money  trust;  we  may 
even  go  so  far  as  to  conceive  of  an  industrial  feudal- 
ism which  could  dispense  with  money  along  with 
competition.  But  such  a  logical  outcome  of  evolu- 
tion would  breed  a  degree  of  social  consciousness 
which  would  be  deadly  to  class  privilege.  History 
has  a  way  of  knocking  off  the  ripe  fruit  before  it 
falls  to  the  ground. 

Meanwhile  we  may  console  ourselves  with  under- 
standing that  the  capitalists  must  somehow  leave 
enough  to  the  workers  to  enable  them  to  reproduce 
labor  power  and  perpetuate  the  capitalist  system, 
much  as  they  did  yesterday  and  as  they  do  to-day. 
No  monopoly  raises  the  price  of  any  article,  which  is 
not  a  necessity,  beyond  the  level  at  which  the  con- 
sumers can  afford  to  buy  it.  But  if  monopolies 
raise  the  prices  of  necessaries  of  life,  they  are  thereby 
raising  the  cost  of  production  of  labor  power,  result- 
ing in  necessarily  higher  wages,  unless  the  workers 
submit  to  a  lowering  of  their  standard  of  life. 

Within  these  limits  monopolies  are  able  to  fix  prices 
without  regard  to  cost  of  production  and  uninfluenced 
by  the  average  profit  rate.  The  extra  profit  thus 
gained  by  them  is  a  deduction  from  the  dividend  that 
remains  available  for  the  other  capitalists  out  of  the 
total  surplus  value  collected  by  the  whole  class. 

We  have  said  that  value  was  buried  and  only  a 
mystery  remained. 


The  Mystery  of  Capitalism  199 

What  is  seen  is  that  the  more  labor  is  ground  out  of 
the  workers,  the  less  the  cost  of  the  product.  How 
then  can  labor  be  the  source  of  value?  Is  not  saving 
in  the  labor  cost  the  same  as  buying  your  material 
cheap?  What  do  we  care  how  much  of  the  labor  of 
others  is  embodied  in  a  product?  It  is  the  cost  of 
production  that  counts.  The  capitalist  is  not  in- 
terested in  measuring  his  profits  by  the  worker's 
share,  but  by  the  capital  invested.  The  fact  is  that 
capital  is  the  controlling  social  factor;  capital,  not 
labor,  regulates  prices.  The  equation:  equal  labor 
for  equal  labor,  is  forgotten;  it  reads  now:  for  equal 
capital  equal  profit. 

Labor  has  become  wages. 

Value  has  become  cost  of  production. 

Surplus  product,  formerly  reserve  stock,  has 
become  profit. 

Thus  more  rubbish  has  been  piled  up  where  labor 
was  buried ;  its  remembrance  has  grown  dim  and  the 
mystery  is  greater  than  ever. 

At  the  beginning  of  this  chapter  we  had  occasion 
to  remark  that  parts  of  any  industrial  capital  may 
be  found  sim^ultaneously  in  the  several  phases  of 
the  industrial  cycle.  On  the  other  hand  an  individu- 
ally owned  industrial  capital  does  not  necessarily 
describe  the  whole  cycle.  Some  concerns  may  be 
so  situated,  owing  to  the  size  of  their  capital,  the 
nature  of  their  products,  the  terms  or  usances  in 
vogue  in  their  particular  industry,  as  to  be  able  to 
sell  their  products  at  the  full  market  price  to  the 
productive  or  individual  consumers,  generally  the 
former.     But  others,  differently  situated,  sell  their 


200  Capital  To-Day 

products  to  merchants  at  less  than  the  full  prices, 
abandoning  to  them  the  completion  of  the  circula- 
tion and  the  realization  of  the  balance  of  the  surplus 
value  contained  in  the  products.  The  merchants' 
capital,  therefore,  forms  part  of  the  industrial 
capital,  but  in  a  specialized  form.  It  enables  the 
productive  capital  to  devote  itself  entirely  to  increas- 
ing the  production,  while  its  own  efficiency  in  the 
sphere  of  circulation  shortens  the  duration  of  circu- 
lation, to  that  extent  increasing  the  profit  rate  of 
industrial  capital  as  a  whole. 

What  price  concession  must  the  productive  capi- 
talists make  to  the  merchants? 

The  latter  expect  a  return  on  their  investment 
equal  to  that  of  the  producers;  if  they  were  denied 
full  participation  in  the  average  profit  rate,  they 
would  turn  manufacturers  themselves.  Conse- 
quently the  price  reduction  to  the  mercantile  capi- 
talists must  be  such  as  to  enable  them  to  realize 
from  their  annual  sales  the  average  income  accruing 
to  a  productive  capital  of  equal  size. 

Now,  the  annual  sales  engineered  by  two  mer- 
chants' capitals  of  equal  size  may  vary  enormously 
from  each  other  in  amount  of  money.  The  dis- 
crepancy is  due  to  the  difference  in  the  length  of 
turn-over  required  by  the  two  different  classes  of 
commodities.  The  cause  of  the  difference  may  be 
found  in  the  nature  of  the  commodities  or  in  the 
existence  of  banking  assistance  in  one  case  and  its 
absence  in  the  other.  It  is  evident,  if  the  principle 
of  equal  profit  for  equal  capital  is  to  live,  that  the 
percentage  of  profit  to  be  added  to  the  cost  price  of 


The  Mystery  of  Capitalism  201 

a  commodity  turning  twenty  times  a  year  cannot  be 
the  same  as  that  of  one  turning  only  twice  a  year, 
otherwise  the  annual  profit  rate  for  the  latter  would 
be  ten  times  as  much  as  for  the  former. 

The  different  percentages  added  to  the  cost  of  the 
respective  commodities,  as  exemplified  by  these  two 
merchants'  capitals,  further  falsifies  value. 

Of  course,  the  gentleman  of  many  turns  and 
corresponding  profit  addition  has  no  idea  of  any 
connection  of  his  method  with  the  question  of  labor 
and  value.  When  he  advertises:  "Our  motto  is 
quick  sales  and  small  profits,"  he  may  possibly 
sometimes  believe  it  himself.  The  shallowest  views 
of  the  political  economists  are  generally  derived  from 
the  merchants'  conception.  To  the  latter  the  mystery 
of  profit  is  complete,  the  duration  of  the  period  of 
circulation  appearing  to  them  as  an  important  ele- 
ment of  value,  whereas  the  productive  capitalists, 
more  directly  in  contact  with  labor,  have  at  least  a 
glimmer  of  the  truth,  as  has  ever  been  evident  from 
their  unalterable  resistance  to  any  reduction  of  the 
hours  of  labor. 

In  the  wholesale  market  the  great  staples  are  dealt 
in  on  the  basis  of  well-defined  quality  gradings,  so 
cheap  an  article  as  cotton,  for  instance,  being  ranged 
in  about  a  dozen  quality  grades.  The  market 
prices  of  the  leading  staples,  as  grain,  cotton,  metals, 
and  others,  are  fixed  daily  by  the  respective  Ex- 
changes. For  other  commodities  regular  price 
currents  are  published,  and  many  manufactured 
articles  are  sold  according  to  price  lists.  The  market 
prices  of  products  not  standardized  are  generally 


202  Capital  To- Day 

estimated  closely  by  the  expert  merchants  handling 
them. 

All  this  is  quite  different  in  the  retail  trade.  It  is 
impossible  for  the  consumer  to  possess  the  knowledge 
to  judge  of  the  values  of  the  variety  of  things  he 
has  to  buy,  and  this  circumstance  exposes  him  to 
being  taken  advantage  of  by  retail  merchants.  The 
reader  will  remember  some  figures  given  in  the  previ- 
ous chapter  regarding  the  landing  cost  of  tea  and 
coffee  in  New  York  and  the  retail  prices  in  the  same 
city.  But  what  are  we  to  say  when  so  competent  a 
writer  on  economic  topics  as  William  Hard^  asserts 
that  the  identical  tea  is  sold  by  the  same  firm  in  the 
same  city  of  New  York  in  its  different  branch  stores  at 
thirty-five  and  seventy  cents?  General  stores,  heading 
their  newspaper  advertisements  by  the  quotation  of  a 
standardized  or  proprietary  article  at  or  even  below 
cost,  while  the  remainder  of  the  quoted  prices  is  of 
not  standardized  articles,  may  possibly  be  selling  the 
latter  at  the  proper  prices.  The  consumer  is  not 
able  to  judge,  but  the  use  of  a  decoy  by  such  stores 
creates  a  moral  presumption  against  them.  That 
a  small  shopkeeper,  in  trying  to  eke  out  a  living, 
sizes  you  up  to  decide  whether  to  charge  you  a  cer- 
tain price  or  twice  as  much  for  a  watch  or  a  potted 
plant,  may  be  a  necessity  for  him,  although  it  plays 
havoc  with  value.  However,  the  writer  had  the 
personal  proof  of  advantage-taking  by  a  large 
millionaire  concern  when  they  asked  for  a  certain 
wooden  article  $3.50  plain  and  $9  with  carving. 
The  difference  he  knew  to  be  at  wholesale  only  $9 

'  "Better  Business,"  Everybody's  Magazine,  May,  1914. 


The  Mystery  of  Capitalism         203 

per  dozen,  i.e.,  75  cents  apiece.  Of  cheating  by 
adulteration  and  false  weights  and  measures  it  is 
not  necessary  to  more  than  remind  the  reader  in  this 
connection. 

The  barons  of  the  middle  ages  and  other  freeboot- 
ers of  the  time  waylaid  the  merchants  and  robbed 
or  blackmailed  them  in  a  brutal  but  straight- 
forward manner.  Present-day  methods  are  more 
refined,  but  more  underhanded.  Neither  the  former 
violence  nor  the  present-day  cheating  form  legitimate 
parts  of  the  respective  social  systems,  feudalism 
and  capitalism,  but  are  nevertheless  economic  factors 
significant  of  the  respective  general  character  of 
each  system. 

Altogether  the  mercantile  capitalists  contribute 
their  honest  share  of  additional  material  to  pile  on 
the  rubbish  heap  which  conceals  value  and  which 
assumes  the  proportion  of  a  mound.  It  appears 
hardly  credible  that  anything  could  lie  buried  under- 
neath. 

We  have  so  far  in  this  chapter  considered  the  two 
divisions  of  capital,  the  productive  and  the  mer- 
cantile, whose  representatives  are  the  functioning 
agents,  personally  or  by  proxy,  in  the  cycle  of  re- 
production and  who  participate  equally  in  the 
average  profit  rate.  In  addition  to  these  two  divi- 
sions, and  originally  grown  out  of  their  technical  need 
in  relation  to  the  movements  of  money,  there  has 
arisen,  with  the  fuller  development  of  the  credit  sys- 
tem, a  new  division  of  capital,  the  loanable  capital 
represented  by  dealers  in  money. 

In  the  capitalist  system  of  society  any  sum  of 


204  Capital  To-Day 

money  whatever  is  per  se  a  title  to  the  labor  of  others, 
which  title  however  can  only  be  realized  by  that  sum 
being  put  into  the  hands  of  productive  or  mercan- 
tile capitalists  for  use  as  capital  in  the  purchase  of 
means  of  production  or  commodities  respectively. 

The  scattered  sums  of  money,  consisting  of  the 
individual  hoards  of  the  industrial  capitalists  (see 
Chap.  III.,  div.  c),  of  the  money  of  money  capitalists, 
the  savings  and  revenue  funds  of  all  classes,  are 
collected  by  these  dealers  in  money,  the  banks,  and 
placed  by  them  at  the  disposal  of  the  entire  class  of 
industrial  capitalists. 

The  bankers,  like  the  merchants,  are  commodity 
dealers,  but  the  commodities  dealt  in  by  the  two  kinds 
of  capitalists  differ  much  from  each  other.  The 
commodity  handled  by  the  former  is  money  capital. 
Its  use-value  consists  in  the  production  of  profit. 
While  the  consumption  of  the  use-value  of  the 
merchant's  commodity  destroys  its  exchange-value, 
the  consumption  of  money  capital  increases  its 
exchange-value.  This  mysterious  nature  of  money 
capital  brings  it  about  that  this  commodity  is  not 
exchanged  for  an  equivalent,  but  is  only  parted 
with  for  a  time,  coming  back  to  its  owner  in  a  state  of 
perfect  preservation  with  an  added  increment.  In 
other  words  the  transfer  takes  the  form  of  the  loan 
and  the  use-value  of  the  money  to  the  borrower  is 
expressed  by  the  rate  of  interest. 

The  formula  of  interest-bearing  capital  (money  or 
its  equivalent)  is  m — M.  Money  becomes  more 
money.  A  given  quantity  is  not  only  itself,  but  also 
another  quantity.     lOO  is  also  io6.     Value  begets 


The  Mystery  of  Capitalism         205 

additional  value.  Kant's  Ding  a?i  sich  becomes  worse 
confounded ;  it  changes  its  specific  weight.  When  the 
productive  or  individual  consumer  gives  money  for 
commodities,  both  buyer  and  seller  receive  equiva- 
lents; only  given  values  are  involved.  But  in  the 
transfer  of  money  capital  as  a  commodity  the  same 
object  has  two  values.  In  the  formula  of  industrial 
capital,  m — c — M,  there  is  at  least  expressed  an 
economic  relation:  production,  the  buying  and  selling 
of  commodities.  All  we  see  in  m — M  is  a  juridical 
transaction  without  economic  connection.  Does 
capital  bear  interest,  the  same  as  a  pear  tree  bears 
pears?  But  the  pear  tree  runs  a  chemical  factory  in 
which  inorganic  matter  is  changed  to  organic.  Yet 
the  political  economists  teach  us  that  it  is  a  natural 
power  of  money  to  bear  interest.  Indeed,  they 
base  on  this  argument  their  justification  of  profits, 
for  if  capitalists  were  not  allowed  to  make  profits, 
could  they  not  convert  their  assets  into  money  and 
invest  it  at  interest  ?  Suppose  they  all,  or  a  considera- 
ble number  of  them,  tried  it — what  would  become  of 
their  capital  value  and  what  of  the  rate  of  interest? 

In  the  cycle  of  industrial  capital  we  see  nothing  of 
interest-bearing  capital.  The  cycle  does  not  care 
whether  any  part  of  the  capital  is  borrowed  or  not. 
The  movement  of  the  loan  capital  is  from  the  out- 
side, directed  towards  and  merged  in  the  current  of 
the  cycle  as  an  indistinguishable  part  of  the  industrial 
capital. 

If  the  memory  of  the  true  source  of  value  were  not 
all  but  extinguished  by  this  time,  we  should  suspect 
that  the  interest-bearing  capital  went  in  on  one  side 


2o6  Capital  To-Day 

of  the  witch's  kitchen,  called  the  productive  process, 
and  came  out  on  the  other  side  with  an  increased 
value,  just  as  some  other  things  have  a  way  of  doing 
in  the  same  place,  and  that  the  result  of  the  witchery- 
is  divided  between  the  functioning  capitalist  and  the 
lender. 

That  loan  capital  should  appear  as  a  distinct 
source  of  value  to  the  mind  of  an  industrial  capitalist 
working  with  borrowed  money  is  plain  enough. 
This  conception,  however,  spreads  to  the  competing 
capitalist  who  works  only  with  his  own  money.  He 
is  not  going  to  deceive  himself;  he  ought  to  show  as 
good  results  in  the  way  of  profit  rate  as  the  borrow- 
ing competitor,  plus  the  interest ;  he  is  rigorous  with 
himself,  not  given  to  easy  self -pacification.  Says 
he  to  the  bookkeeper:  "Before  making  the  final 
net  profit  entry,  charge  off  x%  of  the  capital  account 
to  interest  account!"  Then  a  light  descends  on 
him,  his  mind  becomes  as  clear  as  mud,  and  he  adds 
proudly:  "This  business  has  paid  the  workers  the 
value  of  their  labor;  it  has  paid  capital  what  is  due  to 
it  as  capital,  and  all  the  rest  I  have  created  with  my 
own  head  and  feet."  The  bookkeeper  murmurs  to 
himself:  "Wonder  how  much  he  would  pay  to  a 
principal  clerk  or  how  much  salary  he  would  com- 
mand as  a  principal  clerk."  He  was  no  doubt 
thinking  of  a  passage  in  Wealth  of  Nations  where 
Adam  Smith,  referring  to  a  "principal  clerk,"  says: 
"The  owner  of  the  capital,  though  he  is  thus  dis- 
charged of  almost  all  labor,  still  expects  that  his 
profits  should  bear  a  regular  proportion  to  his 
capital." 


The  Mystery  of  Capitalism         207 

Pile  up  the  rubbish  heap ! 

If  it  is  a  natural  quality  of  money  to  bring  an 
income,  so,  vice  versa,  any  regular  income  may  be 
regarded  as  the  fruit  of  a  certain  capital.  An 
annual  income  of  $600,  supposing  the  prevailing 
interest  rate  to  be  6%,  represents  a  capital  of  $10,000, 
and  lo  presto !  this  capital  springs  forth  into  existence 
where  a  minute  before  there  was  a  vacuum,  just  as 
the  world  was  created  out  of  nothing  under  the 
hand  of  God.  In  beholding  the  performance  of  this 
"stunt,"  whether  called  capitalization  or  necro- 
mancy, the  brain  refuses  any  longer  to  think  of  the 
mystery  of  value. 

Adam  Smith's  capitalist  who  expects  the  usual 
rate  of  profit,  perhaps  minus  his  manager's  salary, 
although  absolved  from  "almost  all  labor,"  is  a 
rather  limping  figure  in  that  author's  "natural" 
system.  But  this  system  is  very  badly  disfigured 
by  another  personage — the  landlord,  of  whom  Smith 
says  his  "rent  costs  him  neither  labor  or  care." 
However,  Smith  was  a  philosopher  and  did  not 
mind  if  a  "natural"  system  had  a  hole  or  two.  The 
political  economists  have  told  us  ever  since  that  labor, 
capital,  and  the  earth  are  the  three  creators  of  value. 
How  the  division  of  the  value  between  labor  and 
capital  is  effected  has  been  referred  to  very  cursorily 
in  these  pages.  Now  as  to  the  earth!  Surely,  if 
the  earth  is  a  creator  of  value,  it  ought  to  get  its 
share  of  it,  perhaps  in  the  shape  of  plenty  of  manure 
or  other  betterments.  Now  there  come  along  a 
number  of  persons  who  claim  that  they  are  represen- 
tatives of  the  earth  and  demand  its  share  in  the  form 


2o8  Capital  To-Day 

of  rent.  If  anybody  tries  to  hold  out  that  the  human 
race  was  put  on  this  planet,  etc.,  they  interrupt 
impatiently  saying  that  they  do  not  know  anything 
about  planets ;  that  the  earth  is  real  estate  and  always 
was;  anyhow  the  law  says  it  is  and  that  in  fact  they 
need  not  rent  out  at  all,  but  could  tell  the  population 
to  betake  themselves  off  that  "planet."  And  as 
the  population  knows  that  the  law  is  always  the 
expression  of  morality,  they  submit  and  pay  rent. 
The  ground  rent  pumped  out  by  the  landowners 
from  the  capitalists  is  part  of  what  the  latter  have 
pumped  out  of  the  workers.  If  the  capitaHst  is  his 
own  landlord  that  does  not  change  the  situation 
for  other  people. 

The  earth  as  one  of  the  sources  of  value: — this 
completes  the  Mystery,  and  the  truth  seems  buried 
beyond  the  possibility  of  resurrection. 

Darwin  in  his  Formation  of  Vegetable  Mold  de- 
scribes how  an  abandoned  city  was  eventually 
buried  by  the  action  of  earthworms,  so  that  the 
plowman  of  future  centuries  never  suspected  what 
was  buried  under  his  land.  Is  there  in  this  not  some 
analogy  to  the  subject-matter  of  this  chapter? 

But  there  arose  a  man  of  such  power  of  analysis 
and  consecutive  thinking,  as  the  human  race  had 
perhaps  not  produced  in  the  thousands  of  years  since 
Aristotle.  Even  as  the  archaeologists  did  in  Egypt 
and  Assyria,  so  he  dug  into  the  overlying  accumula- 
tions which  historic  necessity  had  forced  men  to 
pile  up,  uncomprehended  by  themselves,  and  thus 
he  laid  bare  the  methods  of  social  evolution.  The 
name  of  this  great  man  was  Karl  Marx. 


CHAPTER  X 

FICTITIOUS  CAPITAL 

a.     Transformation   of   profit-bearing    itito  interest- 
bearing  capital. 

Before  the  second  quarter  of  the  nineteenth 
century,  business  corporations  did  not  exist,  ex- 
cept for  a  number  of  banks  (nearly  all  of  them  un- 
important so  far  as  this  country  is  concerned) ,  some 
gas  companies,  and  perhaps  a  few  others.  Until  then 
commercial  and  industrial  enterprises  were  con- 
ducted by  individual,  functioning  capitalists  with 
their  own  money,  at  the  most  with  some  additional 
borrowed  money  entrusted  to  them  by  those  who 
knew  them  personally. 

Near  the  turn  of  the  century  the  dynamic  force  of 
steam  had  come  to  be  applied  in  manufacturing, 
and  the  resulting  increase  in  production  and  widening 
of  markets  called  for  improved  means  of  overland 
transportation  of  raw  and  accessory  materials,  as  well 
as  of  finished  products.  Thus  was  suggested  the 
use  of  the  same  force  for  moving  wagons  on  iron  rails. 
But  the  sum  of  money  required  for  this  great  change 
in  the  means  of  transportation  was  so  stupendous 
that  appeal  had  to  be  made  to  all  available  funds. 
14  209 


210  Capital  To-Day 

In  this  way  the  railroad  company  became  the  real 
pioneer  of  the  great  modern  corporations. 

It  is  difficult  to  realize  that  it  is  only  seventy- 
five  years  since  New  York  and  Philadelphia,  or 
sixty-five  years  since  New  York  and  Boston  were  con- 
nected by  rail.  And  in  this  short  space  of  time  what 
has  been  the  growth  of  the  corporate  form  of  business  ? 

We  shall  find  the  answer  to  this  question  in  the 
United  States  Census  from  which  the  following 
figures  are  taken  (in  million  dollars) : 

The  total  value  of  manufactured  products  in  1909' 
was  20,672,  whereof  was  produced  by  corporations 
16,341,  so  that  the  latter  represented  about  80%  of 
the  total. 

It  is  true  that  many  of  these  corporations  repre- 
sent merely  a  continuation  of  the  ownership  by 
former  partnerships  and  even  individuals  under  a 
changed  legal  organization;  nevertheless  the  above 
figures  afford  an  approximate  picture  of  the  change 
which  has  taken  place,  as  we  shall  be  able  to  recognize 
presently. 

By  the  class  of  fair  sized  and  large  establishments, 
those  whose  annual  production  is  valued  at  over  one 
million  dollars,  a  class  which  constituted  only  1.1% 
of  the  total  number  of  establishments,  there  was 
produced  in  1909  not  less  than  43.8%  of  the  total 
product.^  As  this  same  class  had  produced  in  1904 
only  38%  of  the  total  value  of  manufactures,  it  is  fair 
to  assume  that  it  is  at  present  contributing  about 
one  half  of  the  total  product  value. 

'  Thirteenth  Census  of  ihc  United  States,  vol.  viii.,  p.  135. 
'Ibid.,  p.  180. 


Fictitious  Capital  211 

Even  so  this  class  includes  a  large  number  of 
firms  or  "close"  corporations,  having  an  annual 
production  of  as  little  as  one  million  dollars,  who  by 
their  presence  in  the  above  1.1%,  small  as  this 
percentage  of  all  concerns  is,  tend  to  obscure  in  the 
Census  the  greatness  of  the  real  corporations. 

Were  data  available  to  separate  the  latter  from  the 
firms  and  close  corporations,  the  result  would  still 
be  inadequate  to  offer  a  complete  picture  of  the 
importance  of  the  corporations  in  the  national  econ- 
omy. Manufacturing  represents  only  one  branch  of 
productive  capital  and  it  is  the  one  in  which  the  corpo- 
ration is  least  preponderating.  In  mineral  produc- 
tion, including  coal,  petroleum,  natural  gas,  iron, 
gold,  copper,  etc.,  the  great  corporations  predominate 
overwhelmingly,  and  its  importance  appears  in  the 
sum  of  $2,446,000,000  given  as  its  value  at  the 
places  of  production  in  1913.^ 

Certain  other  branches  of  industry  are  almost 
entirely  the  domain  of  corporations,  as  the  telephone, 
the  telegraph,  gas,  electric  light  and  power  plants, 
expresses,  and  last  but  not  least,  the  railroads. 
These  are  productive  industries  as  much  as  any 
other.  A  railroad  conveying  materials  from  the 
place  of  production  to  the  place  of  their  transforma- 
tion is  a  productive  agent  like  the  railroad  or  human 
carrier  that  conveys  them  from  one  building  of  a 
plant  to  another;  the  same  holds  good  in  the  rail- 
roads' conveying  the  finished  products  from  the 
place  of  production  to  the  place  where  their  use- 
value  can  be  realized.     The  freight  traffic   is  pro- 

'  Statistical  Abstract  of  the  United  States,  19 14,  p.  665. 


212  Capital  To-Day 

ductive  consumption.  The  passenger  transportation 
is  the  production  of  a  commodity  for  instantaneous 
individual  consumption.  To  classify  the  operation 
of  railroads  as  commerce,  as  is  done  in  official  utter- 
ances and  elsewhere,  is  false  and  confusing.  The 
designation  "Interstate  Commerce  Commission" 
for  the  board  of  control  of  transportation  is  a 
misnomer.  The  price  of  both  kinds  of  commodities 
produced  by  the  railroads  is  measured  by  the  money 
received  for  them.  In  191 3  the  receipts  of  the  steam 
railroads  were  $3,057,000,000  (not  including,  of 
course,  revenues  from  investments,  rents,  etc.).^ 

Apace  with  the  formation  of  the  industrial  corpora- 
tions and  called  forth  by  it,  went  the  concentration 
and  incorporation  of  the  loanable  capital  as  national, 
state,  and  savings  banks,  and  trust,  mortgage,  and 
life  insurance  companies.  With  the  exception  of  the 
savings  banks  and  mortgage  companies,  which  lend, 
the  former  partly,  the  latter  entirely,  on  real  estate 
mortgages,  some  fair  sized  banks  in  cities  which 
continue  as  commercial  banks,  and  small  country 
banks  which  do  a  neighborhood  business,  all  the 
others,  comprising  by  far  the  largest  national,  state, 
trust,  and  life  insurance  banks,  are  welded  into  a 
"system"  which  is  closely  identified  with  the  indus- 
trial capital.  The  fact  that  the  central  control  of 
the  system  rests  with  a  few  firms  and  individuals 
should  not  confuse  us  as  to  the  general  corporate 
character  of  the  banking  capital. 

In  contrast  with  the  now  practically  incorporated 
and  united  industrial  and  banking  capital,  the  mer- 

'  Report  of  Interstate  Commerce  Commission,  1913,  p.  46. 


Fictitious  Capital  213 

chants*  capital  presents  the  aspect  of  an  uneven 
development.  It  has  been  eliminated  largely  as 
agent  of  circulation  between  the  industrial  capitalists, 
but  is  tending  toward  the  corporation  form  in  the 
retail  trade.  The  once  proud  merchant  class  which 
had  engineered  the  transformation  from  small  scale 
production  to  capitalist  production,  and  had  long 
domineered  over  the  petty  individual  productive 
capitalists,  has  been  eliminated  entirely  as  interme- 
diary between  the  great  corporations,  who  now  keep 
themselves  the  portion  of  the  surplus  labor  formerly 
ceded  by  them  to  the  wholesale  merchants.  The 
latter  now  only  maintain  themselves  in  the  com- 
petitive industries,  notable  among  which  are  the  tex- 
tile industry  and  the  derivations  thereof.  In  the  retail 
trade  the  merchants  are  being  crowded  on  the  one 
hand  by  industrial  corporations,  producing  articles  of 
individual  consumption,  which  these  sell  direct  to 
the  ultimate  consumer,  and  on  the  other  hand  by 
corporations  handling  all  sorts  of  products  of  the 
competitive  industries.  Of  the  former  class  we 
might  mention  the  producers  of  tobacco,  ice,  shoes, 
candy,  wagons,  automobiles,  a  single  company 
operating  as  many  as  a  hundred  restaurants,  etc. 
To  the  latter  class  belong  corporations  operating 
department  stores  in  a  number  of  cities ;  corporations 
operating  several  department  stores  under  different 
names  in  the  same  city ;  corporations  operating  chain 
stores  for  groceries;  one  corporation  (owned  by  the 
insiders  of  the  Tobacco  Trust)  conducting  a  chain  of 
nearly  one  hundred  drug  stores.  Another  corpora- 
tion conducting  nearly  seven  hundred  five  and  ten 


214  Capital  To-Day 

cent  stores  throughout  the  country  has  a  turn-over 
as  large  as  either  the  New  Haven  or  the  Erie  rail- 
roads, according  to  the  Wall  Street  Journal.  For 
general  rural  retail  trade  a  number  of  mail-order 
corporations  are  gaining  ground  very  rapidly;  one 
among  them  approaching  a  turn-over  equalling 
that  of  the  Erie  and  the  New  Haven  railroads 
combined. 

International  trade,  just  as  international  banking, 
continues  in  the  hands  of  firms. 

Such  have  been  the  astounding  changes  wrought 
in  three  quarters  of  a  century.  In  England,  the 
classic  land  of  capitalism,  the  limitation  of  the 
liability  of  stockholders  to  the  amount  of  their 
stock  was  not  enacted  into  law  until  1855.  If 
capitalist  society,  during  the  first  two  centuries 
after  its  sprouting,  moved  forward  at  a  rate  never 
before  seen,  its  gait  was  greatly  accelerated  by  the 
mechanical  inventions  and  the  use  of  steam  power, 
but  since  the  advent  of  the  railroads  and  great  cor- 
porations it  is  traveling  in  seven  league  boots. 

What  means  this  victory  of  the  corporation  which 
has  taken  place  under  the  eyes  of  our  old  men  ? 

Generally  this  question  is  discussed  from  the  or- 
dinary subjective  viewpoint  of  bourgeois  philosophy; 
it  would  be  too  much  to  expect  professors  and 
journalists  to  approach  the  ticklish  subject  with  an 
objective,  scientific  mind.  Are  corporations  good 
or  bad?  Or  are  the  smaller  ones  tolerable  and  the 
larger  ones  bad?  What  is  the  line  of  demarcation 
between  the  two?  Are  they  the  work  of  prophets 
or  of  evil-minded,  selfish  men?     Should  competition 


Fictitious  Capital  215 

be  preserved?  If  so,  and  since  it  has  not  a  robust 
constitution  and  is  visibly  growing  feebler,  were  it 
better  to  prescribe  a  diet  of  pap  to  keep  it  on  its  legs, 
or  administer  an  alcoholic  stimulus  ?  ^ 

Such  discussions  however  bring  us  no  nearer  to 
an  understanding  of  this  evolution  and  again  we 
must  ask  what  means  this  victory  of  the  corporation  ? 

Foremost,  and  as  a  fundamental  principle  of  the 
change,  stands  the  abolition  of  the  industrial  capi- 
talist as  an  organ  for  the  performance  of  a  certain 
social  function. 

The  early  owners  of  the  means  of  production  had 
naturally  assumed  the  command  of  labor ;  but  ruling 
is  no  sinecure,  and  as  long  as  rulers  have  been  a 
necessity,  they  have  always  themselves  fixed  their 
reward.  So  did  the  functioning  industrial  capi- 
talists. During  the  period  of  individual  industrial 
enterprise,  now  rapidly  passing  into  history,  cases 

'  For  example,  a  modem  political  economist,  Professor  Jevons, 
says  in  the  concluding  chapter  of  The  State  in  Relation  to  Labor: 
"the  subject  [industrial  competition]  is  one  in  which  we  need  above 
all  things — discrimination.  Restrictions  on  industry  are  not  good 
nor  bad  per  se,  but  according  as  they  are  imposed  wisely  and  with 
good  intentions,  or  foolishly  and  with  sinister  intentions."  And 
who  is  to  decide  whether  particular  propositions  are  good  or  bad 
and  pass  judgment  on  intentions?  Professor  Jevons  gives  this 
answer:  "We  must  agree  to  differ;  and  though  we  are  bound  to 
argue  fearlessly,  it  should  be  with  the  consciousness  that  there  is 
room  for  wide  and  bona  fide  difference  of  opinion."  By  all  means  let 
us  agree  to  differ  and  let  us  have  great  argumentations,  fearless  of 
their  unstable  basis,  therefore  mutually  forbearing  and  always  good- 
natured,  like  a  freshmen's  debating  society.  Such  argumentations 
are  taken  seriously  by  many  people  and  have  practical  advantages  in 
enabling  us  to  arrive  at  any  desired  conclusion  regarding  any  pending 
issue. 


2i6  Capital  To-Day 

like  Adam  Smith's  employer  of  a  "principal  clerk" 
were  the  exception.  In  the  present-day  corporation 
all  the  managers  are  employees,  salaried  as  highly 
skilled  workers  at  the  market  rate. 

The  loss  of  the  managerial  function  by  the  indus- 
trial capitalists  has  been  accompanied  by  their  loss 
of  all  control  over  the  use  of  the  property.  In  fact 
the  new  condition  involved  a  complete  change  in  the 
conception  of  property.  x\s  far  back  as  the  memory 
of  the  capitalist  runs,  he  understood  property  to 
consist  of  money,  commodities,  land,  things  tangible 
and  absolutely  in  his  control.  Now  he  sees  it  as 
apparently  no  man's  property,  something  in  a  way 
social,  with  himself  in  possession  of  nothing  but  a 
piece  of  paper  giving  him  title  to  a  share  in  the 
profits,  but  not  to  any  of  the  capital,  except  to 
any  residue  thereof  in  case  of  bankruptcy  of  the 
enterprise. 

But,  someone  may  wish  to  remind  us,  the  owners 
of  the  paper  can  exercise  their  control  by  voting  at  the 
annual  meeting  of  stockholders.  Correct  theoreti- 
cally, in  practice  absolutely  illusory.  For  instance 
the  Southern  Pacific  Co.,  an  $800,000,000  corpora- 
tion, circularizes  all  its  thousands  of  stockholders 
inviting  them  to  the  annual  meeting  at  its  office  in 
Beechmont,  Jefferson  County,  Kentucky,  to  elect 
directors  and  ratify  the  actions  of  the  directors  and 
executive  committee.  This  office  consists  of  a  one- 
room  shack  in  a  back  yard,  serving  as  a  storage 
place  for  a  wheelbarrow  and  some  other  agricul- 
tural implements.  The  thousands,  however,  fail  to 
appear  at  the  appointed  time  in  the  company's  office 


Fictitious  Capital  217 

at  Beechmont,  Jefferson  County,  Kentucky.  In  fact 
nobody  appears  on  the  scene  but  three  employees 
of  the  company,  one  no  doubt  to  act  as  chairman, 
the  second  as  secretary,  and  the  third  probably  as 
the  stockholders,  or  maybe  as  the  sergeant-at-arms. 

Even  when  the  stockholders  of  a  similarly  large 
corporation,  the  Atchison,  Topeka  &  Santa  Fe  Co., 
are  invited  in  their  thousands,  scattered  from  Maine 
to  Oregon,  to  come  to  a  Kansas  town,  where  at  least 
there  exist  accommodations  for  strangers,  it  is  absurd 
to  expect  the  stockholders  to  exercise  their  right 
either  personally  or  by  a  perfectly  free  proxy. 

If  we  go  from  a  rural  place  in  Kentucky  to  the 
other  extreme,  the  great  metropolitan  center  of  the 
country,  embracing  a  population  of  six  millions,  we 
meet  with  exactly  the  same  condition.  There  an 
investigation  by  a  legislative  committee  of  the  abuses 
and  corrupt  practices  of  the  life  insurance  companies 
resulted  in  their  mutualization.  Do  the  policy- 
holders living  in  the  metropolitan  district  avail 
themselves  of  their  right?  Not  one.  The  voting 
is  done  by  a  few  office  clerks  and  agents. 

It  is  plain  that  we  are  confronted  not  by  a  theory, 
but  by  a  condition,  no  matter  whether  the  latter  is 
due  to  a  feeling  of  confidence,  indifference,  or  helpless- 
ness on  the  part  of  the  stockholders.  Whatever  the 
cause  or  causes  may  be,  the  simple  fact  is  that 
the  ordinary  stockholder  has  no  more  influence  on 
the  control  of  the  corporation  than  a  fly  on  the  wheel 
of  a  locomotive.  The  condition  in  the  corporation 
republic  is  the  same  as  in  some  of  the  Latin-American 
republics:  a  clique  gets  into  the  saddle  and  is  "re- 


2i8  Capital  To-Day 

elected  "  as  long  as  it  pleases.  Down  there  they  some- 
times have  successful  "revolutions,"  but  in  this 
country  since  the  union  of  the  two  leading  financial 
groups,  following  their  titanic  struggle  over  the 
control  of  the  Northern  Pacific  Railway  Co.  in  1901, 
any  insurrection  by  outsiders  against  the  "system" 
would  be  worse  than  futile  for  the  insurrectionists. 

But  why  is  the  control  of  a  corporation  so  much 
coveted  by  the  big  capitalists?  Are  they  perhaps 
altruists  obeying  the  urge  of  their  hearts  to  dedicate 
their  time  and  their  abilities  to  the  benefit  of  all  the 
shareholders,  equally  with  themselves,  rather  than 
have  others  burden  themselves  with  this  service? 

The  real  fact  of  the  matter  is  that  the  control  of 
a  corporation  offers  immense  opportunities  for  per- 
sonal enrichment  at  the  expense  of  the  fellow-share- 
holders, exactly  as  the  control  of  a  city  offers  similar 
opportunities  to  Boss  Murphy  or  Boss  Cox  at  the 
expense  of  their  fellow-citizens.  They  do  not  own 
New  York  or  Cincinnati,  they  just  control  these 
cities. 

The  opportunities  to  the  controllers  of  corporations 
present  themselves  in  a  variety  of  ways.  One  of 
them  consists  of  contracts  which  the  men  in  control 
of  a  corporation  can  bring  about  with  certain  con- 
struction, land,  supply,  advertising,  etc.,  com- 
panies, of  which  they  themselves  are  the  principal 
owners.  As  instances  of  construction  frauds. 
Professor  Parsons  mentions^  the  Union  Pacific 
Railroad  which  paid  94  millions  of  dollars  for  work 
which  cost   51   millions;  62   millions  profit  in   the 

'  Railways,  Trusts,  and  the  People,  p.  106. 


Fictitious  Capital  219 

construction  of  the  Central  Pacific  Railroad;  con- 
struction and  other  frauds  in  the  Northern  Pacific 
Railroad  which  made  the  capitalization  of  600  miles 
of  that  line  143  millions,  when  only  22  millions  had 
been  spent. 

They  can  divert  the  most  remunerative  business 
of  a  railroad  to  express  or  fast  freight  lines  in  which 
they  are  much  more  conspicuously  interested  as 
stockholders  than  in  the  railroad. 

Control  includes  the  power  to  direct  the  corpora- 
tions where  they  shall  keep  their  immense  cash 
funds  on  deposit,  and  how  long  they  shall  so  keep 
them ;  it  means  the  power  to  chose  the  time  for  new 
issues  of  securities,  which  issues  are  bought  or  under- 
written by  those  in  control  at  prices  fixed  by  them- 
selves. 

Another  opportunity  is  referred  to  in  the  report  of 
the  Congressional  Committee  appointed  to  inves- 
tigate the  concentration  of  control  of  money  and 
credit,  popularly  known  as  the  Pujo  Committee,  as 
"the  scandalous  practices  of  officers  and  directors  in 
speculating  upon  inside  and  advance  information  as 
to  the  action  of  their  corporations. ' ' '  The  committee 
was  polite  in  using  the  word  "speculation"  which 
includes  in  its  meaning  the  possibility  of  loss.  But 
these  gentlemen  enjoy  a  sure  thing  in  putting  other 
people's  money  into  their  own  pockets. 

But  nothing  could  illustrate  as  clearly  the  value  of 
control,  and  incidentally  the  power  of  J.  Pierpont 
Morgan,  the  head  of  the  "System,"  as  his  purchase 
from  the  lesser  magnate  T.  F.  Ryan  of  $51,000  par 

'  Report  of  Committee,  p.  115. 


220  Capital  To-Day 

value  of  Equitable  Life  Assurance  Society  stock, 
yielding  only  $3570  a  year,  for  approximately  $3,000,- 
000.  The  income  on  the  investment  therefore 
yielded  less  than  &%  per  annum,  but  gave  control 
over  the  Society's  assets  of  over  half  a  billion,  which 
were  not  its  property,  but  trust  funds.  ^  Questioned 
by  the  Pujo  Committee  as  to  his  motives  for  making 
an  investment  yielding  so  low  a  rate  of  interest, 
Mr.  Morgan  emerged  from  the  interrogation,  leav- 
ing the  committee  to  its  own  conclusions. 

His  testimony  as  to  how  he  obtained  the  stock 
was  as  follows :  ^ 

Q.     Did  Mr.  Ryan  offer  this  stock  to  you? 

A.     I  asked  him  to  sell  it  to  me. 

Q.     Did  you  tell  him  why  you  wanted  it? 

A.  No.  I  told  him  I  thought  it  was  a  good  thing 
for  me  to  have. 

Q.  What  did  he  say  when  you  told  him  you  would 
like  to  have  it  and  thought  you  ought  to  have  it  ? 

A.     He  hesitated  about  it  and  finally  sold  it. 

It  is  transparent  that  Ryan  came  down  as  grace- 
fully as  the  coon  when  it  saw  Davy  Crockett's  gun. 

In  short,  the  pecuniary  benefits  of  control  are 
limited  only  by  the  discretion  of  those  exercising  it. 

We  thus  see  that  all  semblance  of  the  former 
functions  of  the  industrial  capitalist,  the  labor  of 
exploitation  and  the  control  of  property,  is  gone.  He 
has  been  converted  into  a  mere  owner  of  a  title  to  a 
share  in  the  profits,  converted  into  a  mere  money 
capitalist. 

'  Pujo  Report,  p.  83. 
^  Id.,  p.  137. 


Fictitious  Capital  221 

We  remember,  however,  from  the  preceding  chapter 
that  the  money  capitaHst  receives  out  of  the  indus- 
trial profits  only  a  part  in  the  form  of  interest,  the 
toll  of  mere  inactive  ownership.  As  the  corporation 
consists  of  profit-making  industrial  capital,  we  must 
examine  the  apparent  contradiction  which  lies  in  the 
fact  that  its  owners,  the  stockholders,  are  only 
interest-drawing  money  capitalists. 

Let  us  first  compare  the  points  of  similarity  and 
dissimilarity  between  the  shareholder  and  the  lending 
capitalist.  They  both  limit  the  sum  which  they  will 
place  in  any  particular  enterprise  ad  libitum.  The 
risk  of  loss  for  both  is  limited  to  the  sum  invested, 
neither  being  liable  for  the  debts  of  the  enterprise. 
They  are  both  not  concerned  with  the  movements  of 
the  industrial  capital,  but  both  must  presuppose 
its  production  of  profit,  if  the  principal  is  to  flow  back 
plus  the  increment.  The  rate  of  the  last  mentioned, 
however,  is  prearranged  in  the  loan  (bonds,  com- 
mercial paper,  corporation  notes,  real  estate  mort- 
gages, etc.)  but  only  approximately  estimated  in 
shares,  with  a  tendency  to  a  somewhat  higher  rate  of 
increment  than  is  ruling  at  the  same  time  for  loans  at 
fixed  interest,  especially  if  these  are  secured  by  pledges. 
Besides  this  difference,  which  is  not  qualitative  or 
essential,  there  is  the  further  one,  of  equally  little 
import,  that  the  principal  returns  to  the  money 
capitalist  directly  from  the  borrower,  and  to  the 
shareholder  indirectly  by  the  sale  of  his  shares. 

The  latter  was  not  always  as  readily  effected  as 
to-day.  The  subscriber  to  shares  of  the  early  cor- 
porations risked  to  tie  himself  up  with  the  venture 


^22  Capital  To-Day 

to  a  certain  degree,  although  of  course  less  so  than 
he  would  have  in  an  individual  enterprise.  His 
position  was  intermediary  between  that  of  industrial 
and  that  of  money  capitalist  and  his  revenue  there- 
fore included  not  only  interest,  but  some  profit  of 
enterprise.  But  with  the  spread  of  corporations 
and  with  the  institution  of  daily  markets  for  shares 
or  stock  exchanges,  the  return  of  the  principal  to 
the  shareholder  at  any  time  he  desired  became 
assured.  It  was  then  that  all  the  conditions  were 
given  for  the  completion  of  the  transformation  of 
the  industrial  into  money  capitalists. 

We  have  now  arrived  at  the  point  when  we  can 
consider  by  what  process  the  profits  of  the  former 
were  transformed  into  the  interest  of  the  latter, 
dividends  being  only  another  form  of  interest.  The 
ready  sale  of  shares  presupposes  the  existence  at  all 
times  of  sums  of  money  seeking  investment  and 
competing  not  only  for  the  lending  opportunities, 
but  also  for  shares.  The  profit  income  attaching 
to  the  shares  is  reduced  by  the  competitive  bidding 
for  them  by  the  buyers  until  it  approximates  the 
ordinary  rate  of  interest.  This  means  that  the 
buyers  are  willing  to  pay  more  for  the  share  than 
the  amount  of  industrial  capital  for  which  it  was 
originally  the  certificate. 

How  is  this  possible?  We  have  already  recorded 
the  fact  that  every  sum  of  money  is  a  title  to  revenue. 
Inversely  any  regular  revenue  is  regarded  as  interest 
on  an  imaginary  capital,  and  if  not  too  precarious, 
like  wages  depending  on  the  health  of  the  workers, 
and  if  transferable,  may  be  transferred  against  the 


Fictitious  Capital  223 

payment  of  a  sum  which  would  yield  an  equal 
revenue  at  interest.  This  creation  of  imaginary 
or  fictitious  capital  out  of  a  revenue  is  called  ' '  capi- 
talization." 

Now,  our  first  investor  has  paid  one  hundred 
dollars  into  an  industrial  venture.  This  money 
begins  to  function  as  industrial  capital  by  the  pur- 
chase of  means  of  production  and  continues  through 
the  metamorphoses  of  the  industrial  cycle. 

The  investor's  money  has  been  changed  into 
industrial  capital  for  all  time.  He  received  for  it  a 
share  certificate  which  represents  a  title  to  profit. 
It  does  not  represent  a  title  to  any  capital.  The 
capital  exists  only  in  the  corporation.  By  the 
investment  he  has  not  doubled  the  existence  of 
the  value  of  the  one  hundred  dollars,  first  as  in- 
dustrial capital  vested  in  the  corporation  and  second 
as  share  capital  vested  in  himself. 

When  the  shareholder  sells  his  share,  the  latter 
enters  a  circulation  of  its  own,  as  interest-bearing 
capital,  quite  independently  of  the  circulation  of  the 
industrial  capital  itself  to  which  it  is  referred  for 
revenue.  The  circulation  of  the  share  therefore 
requires  an  additional  and  entirely  different  capital. 
The  price  of  the  share  has  no  relation  to  the  capital 
value  of  the  corporation.  It  is  determined,  aside 
from  speculative  considerations,  by  the  income 
attaching  to  the  share  and  by  the  prevailing  rate  of 
interest.  So  far  as  the  price  depends  on  the  last- 
mentioned  entirely  extraneous  circumstance,  it  is 
clear  that  a  share  yielding  $10  annually  is  worth 
$200,  if  the  prevailing  rate  of  interest  is  5%,  no  matter 


224  Capital  To-Day 

whether  a  nominal  value  of  $25  or  $100  is  printed  on 
it.  This  explains  how  a  continued  industrial  depres- 
sion, in  due  course  resulting  in  an  accumulation  of 
idle  funds,  may  cause  a  rise  in  the  prices  of  interest- 
bearing  securities,  if  there  exist  at  the  time  no  other 
special  reasons  for  apprehensiveness.  Thus  a  London 
correspondent  in  the  An7ialist  of  February  9,  1914, 
reports:  "Bankers,  .  .  .  overloaded  with  funds 
.  .  .  by  .  .  .  reduced  productive  activity,  are  falling 
over  one  another  to  buy  the  fewer  bills  " — "the  effect 
of  the  scramble  .  .  .  has  been  the  boom  which  we 
have  seen  on  the  Stock  Exchange." 

Here  we  have  an  illustration  of  the  fact  that  the 
share  is  not  representative  of  a  quotient  of  the  capital 
value  of  the  corporation,  but  that  its  price  is  merely 
the  capitalization  of  a  revenue.  In  other  words  a 
capital  value  arises  in  the  share  which  is  entirely 
fictitious  and  dissociated  from  the  value  of  the 
functioning  industrial  capital.  The  latter  is  con- 
demned to  "reduced  productive  activity,"  hence 
yielding  reduced  profits.  Instead  of  reflecting  the 
adverse  circumstances  into  which  the  industrial 
capital  has  fallen,  we  see  the  shares  enjoying  an 
independent  "boom"  due  to  an  outside  factor, 
namely,  the  state  of  the  money  market,  the  ruling 
rate  of  interest  expressing  itself  in  the  case  of  stocks 
and  bonds  by  fluctuations  in  their  prices. 

As  such  periods  of  redundance  in  the  money 
market,  or  the  reverse  condition,  may  seem  a  puzzling 
contradiction  to  the  indestructibility  of  money  of 
account,  referred  to  in  a  previous  chapter,  which 
indestructibility    implies    a    very    high    degree    of 


Fictitious  Capital  225 

regularity  in  the  supply  of  money  of  account,  it  will 
not  be  amiss  to  examine  the  question  in  connection 
with  the  creation  of  fictitious  capital  and  its  circula- 
tion at  fluctuating  prices. 

Of  course,  one  explanation  presents  itself  at  once 
in  assuming  a  general  disposition  at  certain  times  on 
the  part  of  the  money  capitalists  to  hoard  their 
funds,  that  is  to  leave  them  idle  in  the  banks,  rather 
than  run  the  risk  of  employing  them,  under  then 
existing  doubtful  conditions,  as  capital.  This  ex- 
planation is  valid  for  a  time  when  distrust  sets  in 
and  when  usually  the  banks  themselves,  from  their 
better  opportunity  of  seeing  the  shadows  of  coming 
events,  are  the  first  to  start  the  hoarding.  But  this 
explanation  fails  in  the  case  of  a  money  stringency 
arising  in  a  time  of  prosperity  and  optimism,  when 
the  willingness  to  employ  money  as  money  capital  is 
general. 

Inasmuch  as  money  of  account  is  indestructible, 
and  as  we  are  not  venturing  anything  in  assuming 
that  there  has  been  no  reduction  in  the  volume  of 
current  money,  it  is  evident  that  the  stringency 
is  not  due  to  there  being  at  such  time  less  money  in 
existence  than  in  a  period  of  redundancy.  It  is, 
then,  not  a  matter  of  variation  in  the  volume  of  all 
existing  money,  but  only  in  that  part  of  it  available 
at  any  given  time  as  loan  capital.  And  in  our 
inquiry  we  must  distinguish  between  the  two  func- 
tions of  loan  capital — whether  it  is  to  circulate  as 
industrial  or  as  fictitious  capital. 

In  highly  developed  capitalist  countries  all  money 
converges  in  the  banks,  the  social  agents  for  convert- 


226  Capital  To-Day 

ing  money  into  money  capital.  Aside  from  the 
capital  and  surplus  of  the  banks  themselves,  what  is 
usually  termed  "banking  capital"  consists  of  de- 
posits, overwhelmingly  the  money  of  industrial 
capitalists. 

We  have  seen  in  Chapter  III.,  sec.  c,  how  several 
factors  in  the  industrial  cycle  of  the  single  concern 
bring  about  the  temporary  inactivity  of  the  money 
form  of  its  capital.  For  the  concern  itself  the  money 
is  in  this  state  merely  potential  capital  which  is 
converted  into  active  capital  for  another  concern 
by  the  bank. 

This  money  represents  for  its  owner  the  various 
elements  of  value  of  sold  commodities,  viz. : 

(i)  The  money  advanced  as  constant  liquid 
capital  and  variable  capital  and  needed  again  in  due 
time  for  reproduction.  It  must  remain  industrial 
capital  and  is  not  available  for  conversion  into  ficti- 
tious capital. 

(2)  Wear  and  tear  of  fixed  capital.  The  amor- 
tization fund  being  built  up  by  one  set  of  productive 
capitalists  is  continually  lent  by  the  banks  to  the 
other  set  which  is  ready  to  renovate  its  plant.  This 
money  likewise  must  remain  industrial,  and  cannot 
become  fictitious  capital. 

(3)  Surplus  value. 

Part  of  this  money  provides  for  the  personal 
consumption  of  the  capitalist  and  is  not  directly 
available  either  as  industrial  or  fictitious  capital. 
Indirectly,  through  other  capitalists,  it  reenters  the 
industrial  cycle. 

Another  part  must  be  applied  as  an  addition  to  the 


Fictitious  Capital  22^ 

capital,  reproduction  on  an  enlarged  scale  being  a  life 
principle  of  competitive  capitalism.  This  part  con- 
sequently must  remain  in  the  industrial  sphere  and 
cannot  be  diverted  into  the  realm  of  fictitious  capital. 

The  residue  of  the  surplus  value  may  be  converted 
into  fictitious  capital. 

The  bank's  own  money  is  available  for,  and  usually 
invested  in,  fictitious  capital. 

Finally  idle  money  of  money  capitalists,  interests 
and  rents,  minus  the  living  expenses  of  the  money 
capitalists  and  landlords,  may  be  converted  into 
fictitious  capital. 

It  follows  that  the  sum  of  money  available  for  the 
creation  of  additional  fictitious  capital  is  limited  by 
certain  economic  laws.  If  these  laws  are  violated 
by  excessive  issues  of  fictitious  capital,  the  conse- 
quence is  an  insufficient  supply  of  industrial  capital, 
a  rising  rate  of  interest,  reacting  adversely  on 
security  prices,  the  whole  ending  in  a  crisis,  precisely 
as  happened  in  1907. 

The  reverse  condition,  one  in  which  the  industrial 
capitalists  are  favored  by  loans  to  the  detriment  of 
makers  of  fictitious  capital,  is  unimaginable.  It 
would  be  as  much  as  saying  that  the  industrial  and 
banking  capitalizers  were  willing  to  forego  the  hand- 
some profits  of  capitalization. 

We  must,  of  course,  not  overlook  the  fact  that 
the  requirement  of  money  as  industrial  capital  is 
itself  a  variable  quantity,  depending  on  the  cycles 
of  prosperity  and  depression,  inseparable  from 
competitive  capitalism,  as  well  as  on  other  causes, 
such  as  great  natural  catastrophes  and  wars. 


228  Capital  To-Day 

To  be  quite  clear  concerning  the  sums  available 
at  different  times  for  conversion  into  either  industrial 
or  fictitious  capital,  which  sums  fluctuate  greatly 
notwithstanding  the  high  degree  of  regularity  in  the 
volume  of  money,  we  must  possess  a  correct  under- 
standing of  the  situation  of  the  banks.  Although, 
as  said  above,  all  money  converges  in  the  banks, 
yet  collectively  they  generally  have  no  money, 
other  than  their  reserves,  consisting  of  current 
money  of  the  realm.  The  banks  are  on  the  one 
hand  debtors  to  two  groups,  their  stockholders  and 
their  depositors.  On  the  other  hand  they  are  credi- 
tors of  two  other  groups,  legal  persons  who  borrowed, 
and  legal  documents  which  we  call  revenue  titles. 
Between  the  two  groups  on  one  side  and  the  two 
groups  on  the  other  side  the  banks  continually  make 
transfers  forward  and  backward  on  their  books. 
Nothing  changes  but  the  atoms  of  each  group,  and 
all  that  is  of  economic  importance  is  that  the  trans- 
fers be  made  in  the  proper  proportion  from  and  to 
each  separate  group.  This  schematic  grouping 
does  not  conflict  with  the  fact  that  individuals 
figure  simultaneously  as  creditors  and  debtors  of  the 
banks.  Borrowers  of  large  sums  leave  smaller 
sums  on  deposit,  which  presupposes  large  depositors 
who  are  not  borrowing. 

For  the  further  elucidation  of  the  question  as  to  the 
source  and  limitation  of  the  supply  of  money  avail- 
able for  fictitious  capital,  we  may  here  return  profit- 
ably to  the  purveyor  of  war  supplies  whom  we  left 
in  Chapter  VI.  in  the  possession  of  inactive  money. 
Whether   this   will   serve   in   reproduction    or   not. 


Fictitious  Capital  229 

depends  on  the  renewal  of  the  warring  government's 
purchases.  These  again  depend — we  are  only  con- 
sidering the  economic  aspect  of  things — on  the 
government's  ability  to  find  the  necessary  money. 
When  its  treasure  has  been  spent,  its  only  remaining 
ordinary  resource  consists  of  its  income  from  taxes, 
customs  duties,  and  profits  from  state  industries, 
such  as  railroads,  telegraphs,  mines,  postal  system, 
etc.  But  the  tax  receipts  are  greatly  reduced  owing 
to  industrial  depression;  likewise  the  profits  from 
state  industries  which  are  working  now  mainly  for 
the  army  and  not  for  sale  of  its  products  by  the 
capitalist  state  to  the  public,  while  the  receipts  from 
customs  duties  may  be  entirely  cut  off  by  a  blockade. 
To  repair  the  deficit  in  income  relative  to  expendi- 
tures by  raising  the  tax  rates  is  impossible;  they 
would  have  to  be  raised  to  such  an  extent  as  to 
amount  to  a  confiscation  of  profits  and  thus  to  the 
frustration  of  the  purpose  of  capitalist  production. 

If  the  government  cannot  satisfy  its  financial  needs 
from  its  present  income,  it  may  sell  future  income 
for  present  money, — in  other  words  burden  the  fu- 
ture generations,  who  have  had  no  say  in  the  matter, 
with  interest  on  a  new  loan.  Where  is  the  money 
for  this  loan  to  come  from?  We  already  understand 
that  the  money  available  for  conversion  into  fictitious 
capital  is  a  Hmited  quantum.  The  banks  may  sub- 
scribe the  entire  loan,  perhaps  partly  in  calling  other 
loans.  But  there  can  be  no  indefinite  number  of 
repetitions  of  loans,  not  only  because  of  the  normal 
limitation  of  the  money  supply  applicable  t'o  this 
purpose,  but  because  the  curtailment  in  the  produc- 


230  Capital  To-Day 

tion  of  new  value  reduces  the  new  surplus  value  to 
the  bare  needs  of  the  capitalists  for  their  personal 
consumption.  The  surplus  value  may  besides  be 
entirely  offset  for  the  capitalists  by  their  losses  from 
the  temporary  decline  of  the  market  prices  of  all 
their  stagnant  stocks  of  commodities  which  are  not 
strict  necessaries.  It  is  true  that  the  capitalists 
producing  such  commodities  as  projectiles,  explo- 
sives, and  other  war  supplies  are  very  busy  and 
garnering  large  profits  which  they  might  lend  to  the 
government  in  order  to  push  a  good  thing  along. 
But  the  consumption  by  the  government  is  rapid 
and  continuous  and  the  whole  value  of  the  com- 
modities consumed  is  more  than  the  surplus  value 
incorporated  in  them,  of  which  latter,  as  we  have 
seen,  even  only  a  part  is  available  for  fictitious 
capital. 

After  the  money  available  for  fictitious  capital 
has  been  transferred  by  the  spendthrift  governments 
from  the  bank  accounts  of  the  lenders  to  the  bank 
accounts  of  the  manufacturers  of  war  supplies,  the 
governments  are  at  the  end  of  their  tether  so  far  as 
borrowing  is  concerned.  If  the  combatants,  like 
desperate  gamblers  who  hope  that  their  last  piece 
of  money  will  win  for  them,  should  have  recourse  to 
printing  press  money,  it  would  lead  to  the  breakdown 
of  the  capitalist  form  of  society.  Let  no  one  be 
confused  by  the  fact  that  as  recently  as  fifty  years 
ago  there  occurred  in  the  United  States  the  repudia- 
tion of  the  paper  money  of  one  section  of  the  country 
and  the  great  depreciation  of  that  of  the  other 
section,  without  leaving  behind  permanent  ill  effects. 


Fictitious  Capital  231 

That  happened  at  the  beginning  of  the  world's  great 
industrial  forward  movement,  at  a  time  when  the 
world's  production  of  coal  and  iron  in  a  year  was 
not  more  than  what  it  now  turns  out  in  a  few  days. 
Money  of  account  scarcely  existed.  What  the 
social  organism  of  that  time  could  stand,  the  highly 
sensitive  organism  of  to-day,  especially  so  in  its 
financial  mechanism,  could  not  stand.  We  must 
also  not  forget  that  the  financial  disturbance  would 
accumulate  enormously  in  force  by  affecting  sev- 
eral leading  countries,  instead  of  only  a  semi- 
colonial  country,  as  the  United  States  was  in  the 
early  sixties. 

The  sum  of  fictitious  capital  is  largely  in  excess  of 
the  sum  of  money  of  account  and  of  all  money  in 
existence.  According  to  the  Commissioner  of  Internal 
Revenue,  the  capitalization  only  of  business  corpora- 
tions amounts  in  the  United  States  to  almost  exactly 
one  hundred  billions  of  dollars,  of  which  about  two 
thirds  represent  capital  stock  and  about  one  third 
bonds.  The  sum  of  the  fictitious  capital  is  thus  five 
times  as  large  as  the  sum  of  all  money  in  existence, 
real  and  imaginary.  How  is  it  possible  that  any 
excess  of  fictitious  capital  over  all  money  can  exist? 
How  was  the  excess  paid  for? 

We  can  readily  understand  that  the  identical 
money  can  circulate  fictitious  capital  values  in  any 
number  of  multiples  of  its  own  value,  in  the  same 
manner  as  a  dollar  can  circulate  on  one  day  a  number 
of  commodities,  each  of  its  own  value,  by  passing 
from  hand  to  hand.  Besides  the  amount  of  money 
of  account  necessary  for  the  circulation  of  the  vast 


232  Capital  To-Day 

amount  of  fictitious  capital  is  reduced  to  moderate 
proportions  by  the  stock  exchange  clearing  house 
which  balances  sales  and  purchases  in  a  manner 
similar  to  that  in  which  the  banks'  clearing  house 
balances  checks. 

It  might  seem  for  a  moment,  as  if  the  identical 
money  could  also  create  multiples  of  its  value.  For 
instance,  a  number  of  citizens  start  a  bank,  which  uses 
the  paid-in  capital  to  promote  an  industrial  enterprise. 
Each  hundred  dollars  cash  has  created  a  hundred 
dollar  bank  share  and  a  ditto  industrial  one,  a  total 
of  two  hundred  dollars  fictitious  capital.  But  looking 
closer,  we  find  that  the  bank,  as  a  profit-making 
institution  in  itself,  is  a  nonentity;  its  existence  is 
futile,  if  it  can  do  nothing  but  hand  over  to  its 
stockholders  what  these  might  have  encashed  direct. 

The  identical  sum  of  money  may  serve  in  a  chain 
of  an  indefinite  number  of  loans;  it  is  only  the 
original  owner  who  is  able  to  retain  the  interest,  and 
the  last  borrower  who  pays  it.  There  is  only  one 
capital  value  and  only  this  is  entitled  to  interest. 

Supposing,  however,  that  the  hundred  dollars 
had  circulated  as  follows:  A  lends  them  to  B,  B 
buys  commodities  from  C,  C  lends  the  money  to  D. 
In  this  case  the  identical  money  yields  interest  to  C 
as  well  as  to  A.  This  is  because  in  C's  hand  the 
money  no  longer  represents  A's  capital,  but  his  own, 
namely  the  money  form  of  the  value  of  the  commodity 
he  sold. 

We  now  see  that  the  consecutiveness  of  two  loans 
or  of  the  creation  of  two  fictitious  capitals  with  the 
identical  money  is  an  absurdity,  and  that  there  must 


Fictitious  Capital  233 

take  place  at  least  one  sale  of  commodities  of  equal 
amount  between  the  two  loans  or  stock  creations. 
The  bearing  of  this  law  on  our  inquiry  will  appear 
further  on. 

Since  to  reinvest  as  interest-bearing  capital  the 
proceeds  of  the  sale  of  fictitious  capital  would  be 
futile,  according  to  the  law  referred  to,  the  interesting 
and  very  relevant  question  arises  whether,  in  using 
the  money  to  buy  commodities,  the  issuer  chooses 
means  of  production  or  luxuries  for  his  personal 
consumption,  or  if  he  buys  of  both,  what  proportion 
of  each.  We  shall  meet  with  some  enlightenment 
on  this  point  also  later  in  this  chapter. 

If  we  now  understand  how  a  given  sum  of  money 
can  circulate  a  vastly  greater  sum  of  fictitious 
capital,  but  cannot  create  such  capital  in  excess  of 
itself,  we  are  still  confronted  with  the  problem  of  the 
origin  of  the  mass  of  fictitious  capital  in  existence. 

In  the  first  place  a  great  part  of  the  same  has  been 
originally  paid  for  at  much  lower  than  its  present 
market  prices.  One  important  group,  the  railroad 
shares,  were  bought  at  bankruptcy  prices,  that 
is  for  very  little,  as  will  be  told  more  in  detail  in 
Chapter  XII. 

Other  shares  were  originally  issued  under  par, 
especially  when  the  share  capital  represented  nothing 
but  water;  or  they  were  issued  not  for  money  at  all, 
but  against  the  transfer  to  the  corporation  of  the 
establishments  and  good  will  of  the  former  owners, 
mostly  good  will. 

Still  other  shares  were  issued  gratis  to  the  pro- 
moters of  corporations,  as  reward  for  their  services, 


234  Capital  To-Day 

and  to  stockholders  as  extra  dividends.  The  latter 
originated  the  bulk  of  the  capitalization  of  many 
corporations. 

Having  thus  accounted  for  a  great,  if  not  the 
greatest,  part  of  the  floating  fictitious  capital,  and 
found  that  little  money,  or  other  value,  has  been 
given  for  it,  there  still  remains  for  us  to  analyze 
the  balance  of  the  capitalization  supposedly  paid 
for  in  full  by  money. 

It  is  here  that  the  law  of  alternate  loans  and  sales, 
above  explained,  is  to  be  applied.  The  fictitious 
capital  which  has  actually  been  paid  for  in  money 
has  been  so  paid  by  the  identical  money  serving 
repeatedly  as  new  capital,  representing  each  time 
new  commodities  produced  and  sold.  This  fictitious 
capital  was  paid  for  nominally  and  directly  by  a 
comparatively  small  amount  of  money,  in  reality 
and  indirectly  by  long-continued  productive  labor. 
The  workers  paid  for  it. 

b.  Capitalization  applied  at  the  source. 

After  the  transformation  of  profit-bearing  capital 
to  interest-bearing  capital  through  the  agency  of 
competition  for  the  shares  in  circulation  has  reached 
a  certain  development,  the  process  is  applied  at  the 
source  and  fictitious  interest-bearing  capital  is 
created  at  once  in  incorporating  already  existing 
industrial  concerns  or  in  starting  new  corporations, 
having  a  more  or  less  definite  prospect  of  earning 
the  average  rate  of  profit.  The  latter  form  of  capi- 
talization  represents   thus   a   further   step   forward 


Fictitious  Capital  235 

in  the  socialization  of  capital  and  the  elimination 
of  its  owners  as  social  functionaries. 

For  instance  a  firm  employing  a  capital  of 
$1,000,000  and  usually  making  a  profit  of  $400,000 
yearly  is  gaining  40%;  by  the  way  not  an  unusual 
rate  according  to  the  testimony  of  John  Moody, 
which  is  hardly  needed,  so  well  is  the  fact  known. 
If  the  prevailing  rate  of  interest  on  share  investments 
is  7%,  the  aforementioned  firm  may  be  capitalized 
at  nearly  $6,000,000.  The  immediate  profit  of 
$5,000,000  is  divided  between  the  resigning  industrial 
capitalist,  just  being  metamorphosed  into  a  money 
capitalist,  and  the  underwriting  bankers.  It  does 
not  take  much  cogitation  to  see  that  the  new  capital 
originated  by  the  profit  of  incorporation  is  fictitious, 
for  the  value  of  the  establishment  has  not  been  in- 
creased one  cent  by  the  change.  But  a  little  reflec- 
tion will  show  that  the  shares  representing  the  one 
million  are  equally  fictitious.  This  money  was  paid 
for  an  industrial  establishment  to  produce  a  revenue ; 
if  then  this  revenue  is  used  as  the  basis  for  sending 
forth  into  circulation  another  capital,  in  addition  to 
the  one  already  existing  and  functioning,  the  second 
one  is  fictitious. 

If  instead  of  the  hypothetical,  but  normal,  example 
of  a  sextuple  capitalization  given  above,  an  incor- 
poration offers  prospects  of  more  than  the  average 
profit,  owing  to  monopolization  of  an  industry,  pa- 
tent rights,  tariff  protection,  etc.,  the  capitalization 
may  be  relatively  greater.  The  following  is  a 
beautiful  example  gleaned  from  a  report  of  Herbert 
Knox   Smith,  Commissioner  of   Corporations,   sub- 


236  Capital  To- Day 

mitted  in  September,  191 1,  on  the  tobacco  industry 
(American  Tobacco  Co.) : 

For  example,  one  of  the  constituent  businesses  was 
valued  in  1885,  under  competition,  at  $250,000.  Five 
years  later,  at  the  organization  of  the  old  American 
Tobacco  Company,  it  formed  the  basis  for  the  issue  of 
$7,500,000  of  stock.  By  1908,  due  to  various  readjust- 
ments, the  securities  based  on  this  business  had  increased 
to  $22,000,000.  Meantime,  cash  dividends  and  interest 
thereon  had  amounted  to  $16,900,000.  Thus,  the  total 
par  value  of  these  securities  plus  the  dividends  and 
interest  paid  up  to  1908,  amounted  to  nearly  $39,000,000, 
or  156  times  the  value  of  this  particular  business  in  1885. 

The  business  above  referred  to  was  that  of  the 
firm  of  W.  Duke,  Son  &  Co.,  Richmond,  Va.  Lest  it 
might  be  thought  that  this  is  an  isolated  case  of 
enormous  capitalization,  we  present  two  other  ex- 
amples in  the  flotation,  not  of  minor  concerns 
happening  to  enjoy  some  special  advantages,  but  of 
manufacturing  corporations  among  the  largest  in 
the  country. 

In  the  formation  of  the  Sugar  Trust,  Havemeyer's 
Brooklyn  refinery,  which  had  been  capitalized  at 
$500,000  and  taxed  at  less,  was  transferred  and 
$15,000,000  stock  issued  against  it.' 

When  the  Steel  Trust  was  organized,  the  constitu- 
ent companies  were  already  overcapitalized,  never- 
theless : 

One  of  the  constituent  companies,  the  Carnegie  Com- 
pany, received  $492,000,000  of  Trust  securities,  though 

'  See  The  Truth  about  the  Trusts,  by  John  Moody,  pp.  62-67. 


Fictitious  Capital  237 

the  value  of  the  principal  properties  involved  was  only 
about  $34,000,000  as  shown  by  the  books  of  the  com- 
pany for  the  same  year,  1900.^ 

The  deception  regarding  the  fictitious  nature  of 
industrial  "securities"  (just  as  nice  a  word  as  "real 
estate")  is  facilitated  by  their  relation  to  real, 
functioning  capital.  The  illusory,  purely  arithmeti- 
cal nature  of  the  value  of  these  pieces  of  paper  appears 
plainer  in  another,  but  quite  analogous,  kind  of 
paper  capital.  We  mean  the  national  debts,  which 
have  already  been  mentioned  in  another  connection. 
The  money  borrowed  by  the  governments  was  not 
used  as  capital  (with  unimportant  exceptions),  never 
was  intended  to  be  so  used,  although  its  use  as 
capital  was  the  only  way  of  preserving  its  value,  but 
instead  has  pretty  generally  been  wasted  in  powder 
and  smoke.  Nothing  is  left  but  the  debts.  So  here 
we  have  an  illustration  how  not  only  nil,  but  less 
than  nil, — a  minus,  a  debt, — is  capital  in  the  eyes  of 
the  owners  of  the  papers.  What  the  states  are  doing, 
is  to  sell  titles  to  taxes,  derived  from  surplus  value, 
similar  to  the  titles  to  interest,  also  derived  from 
surplus  value.  All  these  titles  are  supposed  to  stay 
valid  till  the  end  of  days.  We  are  drawn  to  a  com- 
parison of  these  papers,  sold  by  the  promoters,  with 
the  papers  sold  by  Tetzel :  pardons  for  sins.  Such  a 
comparison  shows  up  the  characteristic  difference 
between  the  mental  attitude  of  the  beginning  of  the 
sixteenth  century  and  our  own  time.  Tetzel's 
papers    were    a    title    to    everlasting    happiness    in 

'  Railways,  Trusts,  and  the  People,  Frank  Parsons,  p.  II2. 


238  Capital  To-Day 

heaven,  the  modern  capitalist  class  rather  invests 
in  papers  guaranteeing  everlasting  happiness  on 
earth. 

The  difference  between  bonds  and  shares  is  only 
this:  the  former  are  a  mortgage  on  land,  past  labor 
and  living  labor;  the  latter  are  a  mortgage  on  living 
labor  only.  It  is  therefore  logical  that  shares,  in 
consideration  of  their  lesser  security,  should  com- 
mand on  the  money  market  a  higher  rate  of  interest 
than  bonds,  the  difference  being  a  premium  of  risk. 

The  mass  of  fictitious  capital  is  growing  continu- 
ously, partly  from  new  incorporations  or  extension  of 
existing  corporations  and  partly  from  stock  dividends 
distributed  in  order  to  change  the  accumulated  mass 
of  undivided  profits  into  share  capital  or  to  capitalize 
the  increasing  inflow  of  profits.  The  expedient  of 
stock  dividends  is  used  to  make  the  rate  of  profit 
seem  smaller  to  the  uninitiated.  Chap.  VII.,  sec, 
a,  contains  an  instance  of  the  distribution  of  a  stock 
dividend  of  1900%  at  one  fell  swoop.  These  extra 
distributions  are  comprised  in  what  the  elegant 
and  imaginative  language  of  Wall  Street  calls  "cut- 
ting a  melon." 

To  give  an  idea  at  what  rate  fictitious  capital  is 
being  piled  on  to  the  previously  existing  load  we 
quote  from  testimony  by  Charles  A.  Conant  before 
the  Interstate  Commerce  Commission : 

In  the  United  States  there  was  issued  in  1908, 
$1,423,000,000;  in  the  year  1912,  $2,253,000,000. 

In  Great  Britain  capitalization  of  new  companies 
carried  the  amount  from  approximately  $460,000,000 
in  1904  to  about  $1,050,000,000  in  1910. 


Fictitious  Capital  239 

Annual  new  issues  listed  on  the  Paris  Stock  Ex- 
change were  (in  million  francs) : 


1905 

3,886 

1906 

5,076 

1907 

2,847 

1908 

3-480 

1909 

4,294 

I9I0 

5,612 

I9II 

4,696 

I9I2 

5,041 

Dts  were  (in  i 

1850 

8,500 

1900 

31,250 

1912 

42,000 

There  are  periods  when  the  creation  of  fictitious 
capital  is  pursued  with  such  zest  as  to  outrun  the 
available  supply  of  money  of  account.  Such  a 
condition  results  in  a  tightness  of  the  money  market 
and  ushers  in  a  period  of  industrial  depression. 
"Securities"  quotations  drop,  which  according  to 
the  newspapers  is  "great  destruction  of  wealth." 

In  reality  the  price  movements  of  securities  leave 
the  wealth  of  a  country  entirely  unaffected.  The 
transactions  in  these  papers  represent  the  sale  and 
purchase  of  titles  to  income  which  have  nothing  to  do 
with  the  functioning  capital.  What  is  wealth?  A 
quantity  of  use- values.  What  is  the  use- value  of 
rather  stiff  sheets  of  paper  imprinted  all  over? 
We  wait  for  an  answer.      The  $250,000  necklaces 

'  Bureau  of  Foreign  and  Domestic  Commerce. 


240  Capital  To -Day 

which  are  bought  by  capitalist  magnates  and  of 
which  Mr.  Howard,  the  New  York  jeweler,  wrote 
so  entertainingly  in  a  series  of  magazine  articles, 
may  be  wealth,  but  wealth  which  has  for  us  only 
a  symptomatic,  not  an  economic  interest.  Such  a 
necklace  may  remain  a  family  possession  for  a 
thousand  years;  it  represents  only  past  exploita- 
tion and  as  a  mere  personal  ornament  will  never  be 
the  means  for  its  owner  to  appropriate  another  iota 
of  surplus  value.  The  only  element  of  wealth  which 
is  of  interest  in  economics  is  capital,  the  thing  which 
perpetuates  capitalism. 

Paper  capital,  however,  is  totally  fictitious.  We 
know  very  well  that  no  amount  of  capitalization  can 
add  to  the  total  of  the  surplus  value  handed  over 
by  the  working  class  to  the  capitalist  class.  If  the 
creation  of  fictitious  capital,  then,  makes  no  difference 
in  the  division  of  the  product  between  the  two  classes, 
why  do  we  devote  so  much  attention  to  an  analysis 
of  fictitious  capital  ? 

The  evolution  of  our  social  system  has  progressed 
so  far  as  to  open  the  eyes  of  thinking  men  to  an 
impending  radical  change  in  our  social  system. 
They  see  the  impressive  phenomena  of  the  progres- 
sive organization  of  whole  industries  on  a  national 
basis;  the  capitaHsts  deprived  of  their  function 
which  has  passed  to  the  workers;  mere  ownership 
on  one  side,  possession  on  the  other;  growing  inter- 
ference in  industrial  matters  by  the  government, 
national  and  municipal.  All  these  developments 
point  to  the  resumption  of  the  control  of  the  indus- 
tries by  the  workers;  not  as  individuals,  as  in  pre- 


Fictitious  Capital  241 

capitalist  times,  but  as  associates,  and  to  the  ending 
of  the  existence  of  classes  in  the  history  of  mankind. 
Already  men  on  both  sides,  more  preoccupied  with 
the  problems  of  to-morrow  than  with  the  facts  of 
to-day,  are  hotly  debating  the  question  of  purchase 
or  confiscation  by  the  workers,  as  if  it  were  a  terribly 
momentous  question.     Is  it  ? 

What  impresses  such  men  are  the  figures  of 
capitalization.  Where  will  you  get  the  money  to 
pay  for  the  steam  and  electric  railroads  capitalized  in 
191 1  at  $24,067,000,000?'  If  this  were  really  their 
value,  they  would  represent  say  one  seventh  of  the 
national  wealth  adding  up  in  1912  to  $187,000,000,- 
000.  ^     This  is  preposterous  on  the  face  of  it. 

The  real  fact  is  that  the  shareholders  are  merely 
the  titular  owners  of  the  railroads.  This  ownership 
was  or  still  is  in  many  corporations  as  much  a  fiction 
of  law,  as  the  shares  are  a  fiction  of  value.  In 
reality  the  shareholders  of  such  corporations  do  not 
own  a  brick  or  a  nail  of  the  railroads.  Richard  T. 
Ely  says  ^: 

It  is  well  understood  that  in  some  businesses,  and 
especially  in  the  case  of  railroads,  the  only  real  investment 
is  that  which  is  covered  by  the  bonds.  .  .  .  This  is 
admitted  by  those  interested  in  the  business. 

It  is  more  than  admitted  by  James  J.  Hill,  certainly 
a  competent  witness,  who  may  be  believed  when 
he  stated  without  reserve  for  newspaper  publication 

'  Statistical  Abstract  of  the  United  Stales,  19 12,  pp.  313  and  330. 
^Statistical  Abstract  of  the  United  States,  1914,  p.  628. 
3  Monopolies  and  Trusts,  p.  140. 
16 


242  Capital  To-Day 

that  many  corporations  are  even  bonded  beyond  the 
value  of  their  properties  (no  doubt  inchiding  their 
land) . 

Professor  Ely  wrote  the  above  in  1900.  In  the 
following  year  the  Steel  Trust  was  organized  by  the 
issue  of  papers  for  a  billion  and  a  half,  of  which  about 
a  third  in  bonds  was  given  as  purchase  price  to  the 
owners  of  the  plants.  These  bonds  were  largely 
in  excess  of  the  value  of  the  purchased  mills, 
mines,  etc.,  thus  preem.pting  future  accumulation  by 
improvements  and  extensions  to  a  certain  extent 
for  the  sellers,  the  principal  one  among  whom  was 
Andrew  Carnegie.  The  shares  sold  to  the  public, 
amounting  to  many  hundreds  of  millions  of  dollars, 
represented  absolutely  no  value;  their  purchasers 
became  the  nominal  owners  of  the  industrial  capital, 
but  in  reality  they  were  speculators  in  the  possibility 
of  a  surplus  beyond  the  interest  on  the  largely  ficti- 
tious debt.  This  speculation  has  been  successful,  as 
the  trust  was  able  not  only  to  pay  dividends,  but  to 
accumulate  value  against  the  outstanding  shares,  as 
told  in  detail  in  the  next  chapter.  vSome  railroads  have 
of  late  years  fattened  their  properties  in  the  same 
way.  Prospectuses  of  bond  issues  are  apt  to  contain 
the  assurance  that  millions  have  been  expended  for 
acquisitions  of  property  and  betterments,  paid  for 
out  of  income,  although  properly  chargeable  to  capital 
account.  This  new  real  industrial  capital  has  the 
same  origin  as  the  oldest  capital — surplus  value. 

In  the  early  and  crude  days  of  the  corporation, 
the  money  of  the  investor  was  actually  converted 
into  industrial  capital  by  the  purchase  of  means  of 


Fictitious  Capital  243 

production.  This  state  of  affairs  exists  no  longer. 
Issues  of  shares  are  either  sales  of  titles  to  profit 
being  made  or  expected,  the  proceeds  of  such  sales 
going  into  the  pockets  of  the  few  who  turn  their 
business  into  corporations,  including  the  dealers 
in  issues,  the  magnates  of  credit  who  promote  or 
underwrite  the  capitalization;  or  they  are  a  gratis 
distribution  to  the  shareholders  of  a  corporation 
pro  rata  of  their  holdings,  done  for  the  purpose  of 
avoiding  startling  rates  of  dividends  which  would 
in  cases  reach  fifty  times  the  prevailing  rate  of 
interest.  The  old  way  of  allowing  a  $100  share  to 
rise  to  a  price  of  $5000  was  clumsy,  the  new  way  is 
much  sleeker. 

The  reader  will  also  remember  from  our  analysis 
of  money  of  account  that  it  is  not  value  itself,  but 
only  a  title  to  value,  which  title  is  transferred  to  the 
owners  of  land  or  of  fictitious  capital  in  the  purchase 
of  their  specialties.  Those  gentlemen  then  realize 
the  titles  by  the  consumption  of  products.  Now 
suppose  that  the  curtain  falls  on  the  capitalist  period 
of  history  on  a  certain  day  at  twelve  o'clock  by  the 
town  clock,  as  some  naive  persons  imagine  will 
happen.  The  buyers  of  land  and  of  "securities" 
are  on  the  proper  spot  to  demand  compensation  for 
their  value.  Have  they  not  paid  out  their  good 
money  for  those  things?  Might  they  not  have  had 
"a  good  time"  with  that  money,  instead  of  having 
denied  themselves?  Did  they  not  buy  those  privi- 
leges under  the  protection  of  the  law  for  their  own 
and  their  descendants'  enjoyment  forevermore? 

All  very  true.     But  on  the  other  hand  have  not 


244  Capital  To-Day 

the  landowners  and  the  makers  of  fictitious  capital 
received  from  society  value,  the  products  of  labor, 
in  satisfaction  of  the  money  of  account  transferred 
to  them  by  the  purchasers  of  the  rights?  And  now 
these  latter  claim  value  on  the  same  score  from 
society?  Why  should  society  deliver  up  twice? 
Somebody  has  evidently  been  cheated,  but  not  those 
chevaliers  d'industrie,  the  land  shark  and  the  fictionist. 
They  sold  a  bogus  title  to  value  which  did  not  exist 
and  with  the  proceeds  had  their  "good  time." 

But  what  have  the  innocent  buyers  bought? 
They  thought  they  had  bought  the  right  to  exact 
from  the  human  race  rent  for  permission  to  stay  on  the 
land  and  profit  for  permission  to  work.  Alas!  for 
the  transiency  of  class  rule.  It  would  have  been 
better  to  have  had  a  good  time  than  to  invest  in  ' '  real 
estate"  and  "securities." 

Now,  if  any  capitalists  are  to  be  bought  out,  it 
must  first  be  made  clear  just  what  are  the  objects 
of  purchase  and  sale.  Certainly  these  capitalists' 
personal  possessions,  as  houses,  yachts,  country 
villas,  jewelry,  automobiles,  etc.,  are  not  involved. 
The  means  of  production  are  the  only  things  of 
social  importance  and  the  only  ones  which  would  be 
the  subject  of  discussion. 

The  most  important  means  of  production  is  the 
land.  The  North  American  continent  has  been  con- 
verted into  real  estate  for  the  most  part  during  the 
last  one  hundred  years.  In  the  United  States  this 
was  partly  done  by  the  Homestead  Act,  but  largely 
also  by  land  grants  to  corporations,  and  innumerable 
acts   of   corruption   as   set   forth   in   court   records, 


Fictitious  Capital  245 

reports  of  congressional  and  other  investigation 
committees,  and  other  authentic  sources  quoted  in 
Gustavus  Myers's  History  of  Great  American  For- 
tunes, a  painstaking  compilation  of  facts.  But  neither 
the  manner  of  acquisition  of  the  land,  nor  its  con- 
tinually rising  price  ($32.49  per  acre  in  19 10  against 
$19.81  in  1900),'  including  in  congested  cities  an 
extra  addition  to  the  rent  for  access  to  more  air, 
need  detain  us.  The  simple  fact  to  stand  on  is  that 
the  earth  is  not  the  result  of  labor,  the  only  substance 
and  measure  of  value.     Therefore  land  has  no  value. 

Next  in  importance  as  means  of  production  is 
fixed  capital,  consisting  in  the  manufacturing  and 
extractive  industries  of  buildings  and  machinery 
and  in  the  transportation  industry  of  buildings  and 
other  constructions,  rolling  stock,  docks,  vessels, 
etc.  This  fixed  capital  is  subject  to  an  annual 
decrease  in  value  by  a  certain  percentage  through 
wear  and  tear.  This  decrease  had  reappeared  in 
the  value  of  the  products  and,  by  their  sale,  had 
assumed  the  money  form  for  the  owners  of  the  fixed 
capital. 

Finally  the  capitalists  own  the  liquid  capital, 
consisting  of  raw  and  partly  manufactured  materials, 
accessory  materials,  commodities  in  circulation,  and 
part  of  the  gold  and  silver  money.  Of  course,  they 
also  own  part  of  the  paper  money  and  practically  all 
of  the  money  of  account,  but  the  illusory  nature  of 
this  element  of  wealth  has  already  been  sufficiently 
discussed  in  these  pages. 

'  Advance  Statement  of  Census  Director  Durand,  September  7, 
1911. 


246  Capital  To-Day 

We  can  now  eliminate  from  consideration  the  fol- 
lowing items: 

(i)  All  personal  possessions,  former  commodities 
dropped  out  of  circulation  and  become  mere  use- 
values  in  course  of  consumption ; 

(2)  The  land,  which  has  no  value  but  only  the  price 
of  usurpation  and  monopoly  by  a  minority,  and  by 
an  astonishingly  small  minority,  in  the  centers,  where 
the  price  of  land  is  highest,  as  in  the  commercial, 
banking,  and  manufacturing  quarters  in  the  cities, 
the  mineral  bearing  land,  and  in  the  great  railroad 
and  shipping  centers; 

(3)  All  mere  papers,  such  as  stocks,  bonds,  real 
estate  mortgages,  etc.,  which  form  practically  all  of 
what  are  colloquially  called  "investments"  and  are 
fictitious  values ; 

(4)  All  money  having  no  value,  such  as  paper 
currency  and  money  of  account,  the  latter  existing 
merely  in  bookkeeping. 

There  remain,  then,  as  real,  concrete  capital  value 
in  the  hands  of  the  capitalists,  as  outcome  of  surplus 
labor  preserved  by  them,  only  the  following  items: 

(i)  The  fixed  capital,  actively  functioning  in  the 
cycle  of  reproduction ; 

(2)  The  liquid  capital,  equally  so  functioning, 
barring  fictitious  money. 

Of  what  importance  as  values  are  these  two  con- 
stituents of  industrial  capital? 

The  answer  to  this  question  is  already  given  in  our 
elaboration  of  the  United  States  Census  in  Chapter 
VIII.,  so  far  as  the  fixed  capital  in  the  manufacturing 
industry  is  concerned.     It  is  there  shown  that  the 


Fictitious  Capital  ?47 

value  of  this  capital  is  reproduced  by  the  workers 
and  surrendered  by  them  to  the  capitalists  in  surplus 
value  every  fifteen  and  eight  tenths  months. 

As  to  the  liquid  capital  no  figures  are  available. 
It  is,  however,  a  matter  of  common  observation  that 
every  wide-spread  or  general  strike  in  any  industry 
soon  results  in  an  exhaustion  of  the  supplies.  Thus 
the  great  coal  strike  in  England  forced  the  shut-down 
of  factories  after  a  few  weeks'  duration.  From  coal 
to  silks  may  be  a  far  cry.  Yet  every  silk  manu- 
facturer will  confirm  that  the  memorable  strike  in 
New  Jersey  in  191 3  caused  in  a  couple  of  months  a 
"sold  out"  condition  for  all  varieties  of  current  sale 
and  that  the  old  guardians  of  the  shelves,  inventoried 
for  some  years  at  great  discount,  moved  at  un- 
expected prices.  On  the  whole  it  is  fair  to  assume 
that  the  liquid  capital  represents  on  the  average  a 
few  months'  labor,  even  with  the  inclusion  of  the 
average  supply  of  agricultural  products  which  are 
only  reproduced  once  a  year. 

That  the  value  of  the  total  real  capital  should  be 
so  small,  if  compared  to  the  actual  labor  performed 
by  the  multitude  of  human  ants,  may  surprise  many. 
The  reason  is  that  they  have  not  realized  the  in- 
significance of  the  actual  and  real  addition  to  capital 
as  compared  to  the  enormous  consumption  that  is 
continually  going  on. 

Take  only  the  consumption  of  automobiles.  Frank 
E.  Dawson,  statistician  of  the  Automobile  Club  of 
America,  states  in  the  Club  Journal  that  the  industry 
employs  in  the  United  States  directly  and  indirectly 
600,000  men;   that  out  of  the  estimated  15,000,000 


248  Capital  To-Day 

families  the  income  of  13,200,000  families  is  under 
$1200.  These,  he  says,  are  not  interested  in  the 
purchase  of  a  car.  We  should  think  that  many 
families  above  the  $1200  line  are  in  the  same  position. 
Mr.  Dawson  further  says  that  there  are  240,000  fami- 
lies above  the  $5000  income  line,  and  that  there  were 
in  use  at  the  close  of  1913,  1,260,000  automobiles. 
To  understand  this,  one  must  know  that  single  capi- 
talists own  a  dozen  and  more  pleasure  cars.  Here 
we  have  one  article  entering  into  the  consumption 
of  a  comparatively  small  number  of  people,  but 
representing  a  very  large  industry. 

So  it  is  this  ownership  of  past  labor  of  an  average 
of  perhaps  a  year's  time  which  is  the  title  to  present 
labor  and  which  is  to  continue  as  such  title  for  all 
eternity.  No  thanks  are  due  to  the  capitalists  for 
having  saved  a  year's  labor,  instead  of  consuming  it, 
as  they  had  a  right  to  do,  for  thus  they  preserved  the 
goose  which  lays  them  golden  eggs. 

On  the  other  hand  we  are  now  able  to  see  in  its 
true  proportions  the  question,  which  seemed  so 
momentous,  of  compensation  or  confiscation.  Why, 
Vv^hile  the  controversy  might  be  going  on,  the  hands  of 
the  clock  move  around,  another  year  is  past,  and  the 
workers  have  once  more  reproduced  the  capital. 

The  solution  of  the  question  is  not  for  economics. 
Considering  that  capitalist  society  is  the  result  of  a 
historical  process,  the  matter  of  compensation  of 
the  class  that  was  its  beneficiary  by  the  class  which 
suffered  during  its  continuance  will  depend  on  the 
moral  view  which  the  majority  will  take  of  the 
question,  and  perhaps  as  much  on  expediency. 


Fictitious  Capital  249 

For  those  to  whom,  from  Hfe-long  habit  of  think- 
ing, the  mere  idea  of  confiscation  is  abhorrent  and 
who  consider  the  shares  of  a  corporation  as  the  cor- 
poration, let  us  quote  from  an  opinion  in  the  United 
States  Supreme  Court  by  Mr,  Justice  Brewer,  than 
whom  no  more  respected  man  ever  sat  on  the  Supreme 
Court  bench,  in  which  he  said^  that  a  railroad 
expresses  its 

willingness  to  do  the  work  of  the  state,  aware  that  the 
state  in  the  discharge  of  its  public  duties  is  not  guided 
solely  by  a  question  of  profit.  It  may  rightly  determine 
that  the  particular  service  is  of  such  importance  to  the 
public  that  it  may  be  conducted  at  a  pecuniary  loss, 
having  in  view  a  larger  general  interest.  .  .  .  While  we 
have  said  again  and  again  that  one  volunteering  to  do 
such  services  cannot  be  compelled  to  expose  his  property 
to  confiscation,  that  he  cannot  be  compelled  to  submit 
its  use  to  such  rates  as  do  not  pay  the  expenses  of  the 
work,  and  therefore  create  a  constantly  increasing  debt 
which  ultimately  works  its  appropriation,  still  is  there 
not  force  in  the  suggestion  that,  as  the  state  may  do 
the  work  without  profit,  if  he  voluntarily  undertakes  to 
act  for  the  state  he  must  submit  to  a  like  determination 
as  to  the  paramount  interests  of  the  public? 

This  means  that  the  railroads  may  be  compelled 
under  our  present  constitution  and  laws  to  operate 
at  cost,  even  to  the  extent  of  defaulting  on  the 
interest  on  their  bonds.  What  good  would  it  do  the 
holders  of  the  latter  to  proceed  to  foreclosure  and 
become  themselves  the  owners?  The  roads  would 
still  be  operated  at  cost  for  the  benefit  of  the  railroad 

'  183  United  States,  93,  94. 


250  Capital  To-Day 

workers  and  the  general  public.  Their  character 
as  capital  has  been  taken  from  them;  they  remain 
mere  means  of  production  for  the  benefit  of  the 
people.  The  same  principle  holds  good  for  other 
corporations  engaged  in  interstate  trade,  and  nearly- 
all  the  large  corporations  belong  to  this  class. 


CHAPTER  XI 

THE  CONCENTRATION  OF  INDUSTRIAL  CAPITAL 

In  pre-capitalist  times  the  object  of  production 
was  to  satisfy  the  wants  of  the  workers  by  the 
exchange  of  their  products  with  each  other.  The 
result  of  such  surplus  labor  as  some  of  the  workers 
performed — surplus  because  in  excess  of  the  ordinary 
needs  of  men  in  that  period — provided  for  them  a 
fund  which  permitted  them  to  indulge  in  more  than 
the  average  comforts  or  which  served  them  as  a 
reserve  against  the  vicissitudes  of  life.  The  surplus 
product  remained  in  private  possession  and  was  not 
an  economic  factor. 

The  purpose  of  capitalist  production  is  the  reaping 
of  profit.  Profit  was  the  end  which  the  bourgeoisie 
had  in  view  in  its  demand  that  every  sphere  of 
production  should  be  open  to  the  free  movement 
of  capital.  Competition  was  to  regulate  prices  and 
profits.  And,  indeed,  competition  became  the  whip 
that  urged  the  human  race  to  the  fastest  gait  of 
which  it  had  until  then  been  capable  along  the  road 
of  progress. 

Free  competition  forced  every  capitalist  to  try  to 
attain  the  highest  degree  of  productiveness  of  the 
labor  he  commanded  and  thus  to  reduce  the  cost  of 

251 


252  Capital  To-Day 

his  product  to  the  lowest  possible  minimum.  This 
was  accomplished  in  the  sequence  of  simple  co- 
operation, division  of  labor,  mechanical  inventions, 
the  application  of  steam  power  and  of  the  scientific 
discoveries,  and  the  introduction  of  machinery. 
Every  step  forward  in  the  technical  development 
meant  an  increased  outlay  for  plant  and  materials. 
This  process  shut  out  the  smaller  or  less  successful 
capitalists.  Only  those  who  had  succeeded  in  the 
accumulation  of  the  profits  necessary  for  production 
on  an  enlarged  scale  could  remain  in  the  race. 

Therefore  capitalist  production,  in  contrast  with 
its  predecessor,  is  essentially  a  process  of  accumula- 
tion and  concentration.  This  process  operated 
slowly  during  the  period  of  individual  enterprise, 
when  any  increase  in  the  scale  of  production,  owing 
to  its  technical  requirements,  had  to  wait  for  a 
certain  minimum  accumulation  of  profits. 

But  this  limitation  was  removed  by  the  appearance 
of  the  industrial  corporation,  an  organization  of 
capital  which  is  independent  of  the  individual 
fortune.  It  appeals  to  the  general  money  market 
and  collects  the  scattered  hoards,  therein  resembling 
the  banks,  the  difference  being  only  that  for  its 
owners,  the  money  is  converted  by  the  industrial 
corporations  into  fictitious  capital,  whereas  the 
banking  capital  remains  loanable  capital.  Instead 
of  awaiting  the  necessary  accumulation  of  profits 
for  its  expansion,  an  existing  concern  need  only 
convert  itself  into  a  corporation  and  increase  its 
money  capital  by  the  issue  of  fictitious  capital,  or  if 
already   a   corporation,   increase  its  capitalization. 


Concentration  of  Industrial  Capital  253 

For  new  enterprises  of  every  kind  the  limitation 
imposed  formerly  by  the  extent  of  the  private  fortune 
has  disappeared  ever  since  the  builders  of  the  first 
railroads  accomplished  their  purpose  by  having 
recourse  to  the  united  capital  of  the  capitalist  class 
of  the  world.  The  whole  social  money  capital  is 
held  in  readiness  to  be  converted  into  industrial 
capital.  The  lack  of  money  no  longer  stands  in  the 
way  of  technical  improvements  on  the  largest  scale, 
such  as  the  foundation  of  Gary,  or  the  Pennsylvania 
or  New  York  Central  railroad  stations  in  New  York, 
improvements  which  called  for  outlays  of  fifty  to 
one  hundred  million  dollars  each ;  or  of  the  consolida- 
tion of  related  industries,  like  steel  manufacture 
with  the  mining  of  ore  and  coal,  with  the  production 
of  pig  iron  and  coke,  and  with  transportation  by 
vessels  and  railroads ;  or  of  the  annexation  of  compet- 
ing concerns  by  the  purchase  of  a  controlling  number 
of  their  shares,  financed  with  money  obtained  from 
the  sale  of  fictitious  capital,  as  has  been  the  common 
practice  in  railroad  consolidations.  Of  the  latter 
Professor  Parsons  gives  the  following  example  ^ : 

"The  Pennsylvania  R.R.  is  supposed  to  be  peculiarly 
free  from  inflated  capitalization.  It  claimed  January 
I,  1905,  $193,000,000  as  the  cost  of  road  and  equipment 
a.nd  full  value  of  real  estate,  while  the  capitalization  was 
then  $418,000,000.  The  difference  of  $225,000,000  was 
issued  to  purchase  securities  of  other  corporations,  mostly 
of  railroads,  for  example  a  large  amount  of  the  stock  of 
the  Reading  Co.,  which,  in  its  turn,  holds  $197,000,000 
securities  of  other  companies:  87  million  dollars  Phila- 

•  Railways,  Trusts,  and  the  People,  p.  102. 


254  Capital  To-Day 

delphia  &  Reading  Coal  &  Iron  Co.,  no  million  dollars 
of  some  54  railroads.  Among  the  latter  is  the  Central  of 
New  Jersey  which  owns  $30,000,000  of  securities  of  still 
other  companies." 

Professor  Parsons  adds : 

If  anybody  could  take  a  year  off  for  the  purpose,  he 
might  find  out  how  much  duplication,  triplication, 
quadruplication,  etc.,  there  is  hidden  under  the  serene 
surface  of  the  Pennsylvania  R.  R.  capitalization. 

The  access  which  the  corporation  has  to  the 
general  money  market  through  the  sale  of  fictitious 
capital  frees  it  from  the  financial  handicap  of  the 
individual  concern,  and  enables  it  to  confine  any 
consideration  of  enlargement  of  plant,  technical 
improvement,  or  annexation  of  related  industries 
exclusively  to  the  question  of  advisability  on  the 
score  of  a  satisfactory  increase  in  the  corporation's 
profit  rate.  The  industrial  corporation  is  thus 
enabled  to  attain  a  technical  superiority  over  the 
individual  enterprises  and  maintain  this  advantage 
at  least  for  a  time,  during  which  extra  profits  may- 
be garnered  and  a  further  lead  in  the  competitive 
struggle  gained.  The  corporation  so  situated  can 
employ  the  world's  best  scientific,  technical,  and 
managerial  talent  for  which  salaries  of  $100,000  and 
over  are  not  uncommon.  This  assures  permanently 
the  able  conduct  of  the  large  corporate  concern, 
when  the  fate  of  an  individual  concern  depends  on 
the  capacity  of  whoever  by  the  accident  of  inheritance 
succeeds  to  the  management. 


Concentration  of  Industrial  Capital  255 

It  is  nowadays  generally  only  the  very  large 
establishment  which  is  in  a  financial  and  technical 
position  to  handle  big  things  in  the  way  of  patents 
or  scientific  discoveries  of  great  economic  value. 
Time  was  when  such  discoveries  were  the  free  gifts 
of  the  scientists  to  the  whole  class  of  industrial 
capitalists.  Now  the  great  industrial  corporations 
have  their  own  well  equipped  chemical,  physical, 
and  mechanical  laboratories,  where  staffs  of  scientists 
and  technicians  are  working  on  the  problems  of  their 
industries.  The  pursuit  of  important  inventions  by 
outsiders  is  generally  discouraged.  The  mere  fact 
that  an  invention  presents  a  great  improvement  is 
far  from  being  a  reason  for  its  adoption  by  the  big 
corporation,  often  the  only  concern  in  a  position  to 
apply  the  same.  The  corporation  managers  are  not 
at  their  post  to  safeguard  the  interests  of  society  in 
general ;  they  are  intent  only  on  one  thing :  to  show 
as  large  profits  as  possible  to  their  directors.  There- 
fore it  becomes  a  cold-blooded  question  with  them 
whether  to  buy  the  outside  patent  in  order  to  use  it 
or  in  order  to  suppress  its  use,  or  whether  it  pays 
better  to  simply  violate  it  and  wear  out  the  inventor 
by  litigation  ruinous  to  the  latter. 

While  industrial  corporations,  no  less  than  in- 
dividual enterprises,  are  conducted  with  the  single 
view  to  as  large  profits  as  possible,  yet  on  the  other 
hand  it  is  not  compulsory  for  the  former  to  make 
any  profit  at  all.  The  stagnant  individual  concern, 
owing  to  its  owner's  individual  consumption,  drifts 
into  bankruptcy.  Not  so  the  corporation,  which  may 
go  on  forever  selling  at  cost.     The  Southern  Railway 


256  Capital  To-Day 

has  not  paid  a  dividend  in  twenty  years  on  its 
common  stock  and  scarcely  any  on  its  preferred,  yet 
it  goes  on  serenely.  Of  course,  its  shares  have  only 
a  speculative  value,  but  they  may  change  hands 
ever  so  often,  the  functioning  capital  itself  does  not 
change  hands  and  is  quite  unmindful  of  what  those 
papers  are  doing. 

Any  individual  concern  that  in  its  annual  state- 
ment made  for  the  purpose  of  obtaining  credit  fails 
to  show  profit  during  the  year  is  looked  at  askance 
and  expected  to  explain;  in  case  of  repetition  its 
rating  is  reduced  and  its  credit  suffers.  On  the  other 
hand,  a  corporation  Hke  the  Bethlehem  Steel  Works, 
which  pays  no  dividends  on  its  common  and  only 
sporadic  ones  on  its  preferred  shares,  can  borrow 
milHons  at  the  ordinary  market  rate  of  interest. 
This  is  so  because  the  banking  capital  is  familiar 
with  the  status  of  the  large  corporations  in  wliich  it  is 
financially  interested. 

There  are  also  other  circumstances  which  affect 
the  borrowing  credit  of  individual  (or  close  corpora- 
tion) concerns,  but  not  that  of  the  large  corporation. 
Generally  the  former  can  obtain  credit  on  the  pro- 
portion of  its  current  liabilities  to  its  Hquid  assets;  in 
exceeding  this  limit  the  lender  would  become  a  party 
interested  in  the  fixed  capital  and  cease  to  be  a  mere 
money  capitalist.  Also  the  existence  of  a  mortgage, 
especially  if  it  includes  chattels,  for  instance  the 
machinery,  usually  militates  against  an  individual 
concern's  credit.  The  big  corporations,  per  contra, 
may  be  bonded  for  their  entire  fixed  capital  and  yet 
have  easy  borrowing  credit,  their  real  profit-producing 


Concentration  of  Industrial  Capital  257 

capacity  being  understood  by  the  men  who  control 
credit  and  who  are  often  themselves  directors  of  these 
industrial  corporations. 

The  freedom  of  the  corporation  from  the  compul- 
sion to  furnish  a  revenue  to  any  capitalists  has  been 
referred  to  above.  Even  when  profits  have  been 
made  by  a  corporation,  it  may  abstain  from  dis- 
tributing any  part  thereof  to  the  stockholders  and 
instead  apply  the  profits  to  the  economic  needs  of 
the  concern,  such  as  improvements  of  the  plant, 
the  overcoming  of  competition,  or  simply  the  crea- 
tion of  a  contingency  fund,  regardless  of  the  hardship 
which  the  absence  of  the  revenue  may  entail  on 
individual  stockholders. 

At  the  same  time  the  few  large  stockholders,  by 
whom  every  corporation  is  controlled,  may  utilize 
their  advance  knowledge  either  as  to  a  coming 
suspension  of  dividends  or  a  coming  declaration  of 
an  extra  dividend  for  "long"  or  "short"  operations 
on  the  stock  exchange.  This  safe  speculation  is  an 
additional  means  for  the  concentration  of  wealth. 
During  the  period  from  April  i,  1901,  to  December 
31,1913,  the  Steel  Trust  made  net  profits  of  $898,000,- 
000  and  paid  $546,000,000  dividends.  There  were 
years  when  there  were  available  14.4%  and  15.6% 
respectively  for  dividends  on  common  shares,  but 
in  which  years  only  2%  was  distributed.  The  mar- 
ket price  of  common  shares  has  fluctuated  all  the 
way  between  8  f  and  94  |.  In  all  such  cases  the 
small  and  uninitiated  stockholders  sell  out  long 
before  the  fattening  of  the  corporation  reveals  itself 
in  increased  profits  and  dividends. 


258  Capital  To-Day 

To  recapitulate,  corporate  industrial  capital,  owing 
to  the  separation  of  its  function  from  its  ownership, 
has  freed  itself  of  the  handicaps  and  limitations 
of  the  individual  enterprise  which  is  dependent  on 
the  character  of  its  accidental  owner,  his  ability  and 
personal  needs,  his  fortune  and  his  credit. 

Corporate  industrial  capital  incidentally  removes 
that  resistance  to  the  tendency  toward  industrial 
concentration  which  consists  of  the  partition  of 
private  fortunes.  The  latter  now  affects  only  stocks, 
not  stock  companies. 

The  tendency  toward  industrial  concentration 
has  been  aided  by  the  desire  of  individual  capitalists, 
from  private  considerations,  to  convert  future  profits 
into  present  money.  This  desire  of  the  owners 
is  seconded  by  the  prospect  of  the  promoters'  profits 
accruing  to  the  dealers  in  credit  by  such  conversions 
or  by  consoHdations  of  private  enterprises  into 
corporations. 

Testimony  before  the  United  States  Industrial 
Commission  indicates  that  in  organizing  the  Stand- 
ard DistilHng  Co.  one  hundred  and  fifty  dollars 
stock  was  given  as  reward  to  a  promoter  for  every 
one  hundred  dollars  cash  he  was  able  to  bring  in. 
The  stock  so  issued  was  apart  from  the  stock  bought 
by  the  underwriters  and  from  that  given  to  the 
owners  for  their  properties. 

Professor  Parsons  mentions  the  following  as 
rewards  to  promoters:  American  Tin  Plate  Co., 
ten  milHon  stock  (out  of  $46,325,000  issued) ;  Ameri- 
can Steel  &  Wire  Co.,  fifteen  million  stock. 

It  has  been  stated  that  J.  P.  Morgan  &  Co.  re- 


Concentration  of  Industrial  Capital  259 

ceived  forty  million  dollars  stock  for  organizing  the 
Steel  Trust. 

Of  course,  these  personal  motives  of  owners  and 
promoters  can  enter  into  play  only  once.  The  endur- 
ing benefit  to  the  capitalists  in  the  consolidation 
of  their  competing  plants  lies  in  the  ability  of  the 
trusts  to  earn  more  than  the  average  profit  rate. 
Let  us  first  take  a  look  at  some  of  those  profits. 

We  have  already  had  occasion  to  refer  to  the  rate  of 
profit  made  by  the  Tobacco  Trust. 

Earlier  in  this  chapter  are  mentioned  some  of  the 
profits  of  the  Steel  Trust,  but  not  all  of  them.  In 
addition  to  the  dividends  there  mentioned,  the 
corporation  "has  turned  back  into  the  property 
a  surplus  equal  to  sixty-six  dollars  a  share  on  the 
common  stock."'  The  reader  already  knows  that 
the  whole  share  capital  originally  represented  no 
existing  value:  therefore  the  profits  cannot  be 
expressed  in  terms  of  percentage  on  industrial 
capital. 

The  same  condition  exists  in  regard  to  the  Sugar 
Trust,  of  which  the  stock  was  likewise  all  water. 
The  bonds  alone  amounted  to  $10,000,000  and 
covered  operating  plants  valued  at  only  $7,740,000. 
In  addition  thereto  shares  were  issued  for  $75,000,000, 
subsequently  increased  to  $90,000,000,  on  which  divi- 
dends of  7%  per  annum  have  been  paid  since  1901. 
But  this  is  not  all.  The  bonds  have  been  retired 
and  a  surplus  has  been  accumulated  which  amounted 
on    December    31,    19 13,     to    nearly    $29,000,000. 

•  P.  H.  Carey,  Editor  Poor's  Manual,  in  letter  to  N.  Y.  Times, 
November  25,  1913. 


26o  Capital  To-Day 

Adding  the  market  value  of  the  shares  to  the 
dividends  and  interest  thereon,  it  appears  that 
Havemeyer's  $500,000,  regarding  which  there  are 
some  details  in  the  chapter  on  fictitious  capital, 
have  borne  fruit  at  the  rate  of  over  700%  for  every 
year  since  1901.  It  is  said  that  not  even  is  this  all, 
as  the  men  controlling  the  trust  own  as  individuals 
the  sources  of  supply  of  the  trust's  Cuban  raw 
material. 

The  Oil  Trust  "has  been  known  to  make  530% 
on  its  whole  capital  year  after  year,  and  some  of  its 
investments  and  enterprises  have  netted  it  as  high 
as  800%  a  year,  and  in  one  case,  through  railroad 
rebates,  over  3000%  profit  per  year  was  obtained."^ 

In  the  government  suit  against  the  Harvester 
Trust  the  defense  proved  that  the  separate  plants, 
before  organization  of  the  trust,  earned  200%  per 
annum  in  the  years  1898  to  1902. 

The  Calumet  and  Hecla  Mining  Co.  distributed 
as  high  as  583%  on  the  paid-in  capital  (in  1906),  which 
rate  of  dividend  however  fell  in  191 2  to  350%,  no 
doubt  in  consequence  of  a  lower  market  price  for 
copper  ^  No  wonder  that  the  stockholders,  being 
thus  hard  put  to  it  to  make  an  honest  Hving,  fought 
like  tigers  against  their  striking  miners,  considerably 
disturbing  the  State  of  Michigan. 

There  are  many  instances  known  of  smaller  con- 
cerns doing  quite  as  well. 

Of  the  Farr  Alpaca  Co.,  Holyoke,  Mass.,  "employ- 

•  See  Wealth  against  Commonwealth,  H.  D.  Lloyd,  pp.  67,  99,  100. 
'Average    prices:    1906,    16.60c.;    1912,    13.52c.       35th    Census 
Abstr.,  Table  282. 


Concentration  of  Industrial  Capital  261 

ing  upwards  of  3000  hands"  (meaning  persons,  not 
1500  pairs  of  hands),  David  I.  Walsh,  Democratic 
candidate  for  Lieutenant  Governor,  now  Governor 
of  Massachusetts,  said  in  a  speech:  "Its  regular 
dividend  ...  is  equal  to  576%  on  its  original  cash 
capital."^ 

The  Ford  Motor  Co.,  capitaHzed  at  $2,000,000, 
made  a  profit  in  its  fiscal  year  1912-13  of  $37,597,- 
312.  We  do  not  know  whether  the  capital  was 
actually  paid  in,  at  any  rate  we  forgo  figuring 
the  percentage  of  profit. 

In  the  case  of  Waltham  Watch  Co.  vs.  Charles 
A.  Keene  before  the  Supreme  Court  in  191 1  it  ap- 
peared that  the  defendant  bought  the  plaintiff's 
products  in  London,  shipped  them  to  Arabia,  thence 
to  the  United  States,  where  he  entered  them  free 
of  duty  as  American  manufacture  and  undersold  the 
trust  (the  several  watch  companies  act  as  a  trust), 
although  the  long-distance  transaction  yielded  Keene 
a  net  profit  of  30%  of  the  value  of  the  watches. 

Many  similar  cases  are  known  where  American 
goods  are  sold  much  cheaper  abroad  than  at  home. 
The  same  policy  is  pursued  by  the  trusts  in  Germany. 

When  we  come  to  franchise  trusts  we  find  similar 
rates  of  profits. 

Postmaster  General  John  Wanamaker  wrote  in 
1890^:  "An  investment  of  $1000  in  1858  in  Western 
Union  stock  would  have  received  up  to  the  present 
time  stock  dividends  of  more  than  $50,000  and  cash 
dividends  equal  to  $100,000."     As  the  stock  was 

'  Journal  of  Commerce,  N.  Y.,  October  17,  191 1. 
^  Argument  for  a  Postal  Telegraph. 


262  Capital  To-Day 

then  about  par,  the  profits  were  450%  per  annum 
on  the  real  investment,  not  figuring  interest. 

In  a  speech  in  the  House  of  Representatives  on 
December  22,  1913,  Mr.  Lewis,  the  originator  of  the 
parcel  post,  said:  "In  postal-telephone  countries 
the  local  toll  tariffs  tend  to  run  about  one  half  the 
charge  for  a  letter,  while  here  they  run  with  the  street- 
car fare  and  sometimes  exceed  it." 

The  list  of  examples  of  enormous  profits  could  be 
easily  lengthened,  but  it  suffices  to  show  that  there 
exists  in  a  variety  of  industrial  spheres  a  higher  than 
average  rate  of  profit.  How  does  this  affect  the 
competitive  capitalists  and  the  workers  ?  To  answer 
the  question  we  must  first  understand  the  cause  of 
the  high  rates  of  profit. 

Not  only  Mr.  Tom  Lawson,  the  author  of  Frenzied 
Finance,  but  people  whose  business  it  should  be  to 
know  better,  accuse  overcapitalization  of  being 
the  cause  of  the  exploitation  of  the  many  by  the  few. 
That  the  wish  of  being  able  to  produce  a  return  on 
a  great  overcapitalization,  and  therefore  of  obtaining 
as  high  prices  as  possible  for  the  products,  actuates 
the  corporation  managers  is  a  matter  of  course,  but 
the  wish  does  not  alter  the  law  of  prices.  The  fixed 
capital,  whether  of  a  corporation  or  of  a  firm,  may 
have  been  written  off  entirely  on  the  amortization 
account,  yet  that  fact  would  not  induce  any  capitalist 
to  sell  a  bit  cheaper  than  necessary.  The  shares  of 
the  Calumet  Co.  above  mentioned  or  of  the  Fifth  Ave- 
nue Bank  of  New  York  are  worth  forty  times  their 
face  value.  Was  the  former  less  determined  in  its 
fight  against  the  strikers  for  profits,  because  a  share 


Concentration  of  Industrial  Capital  263 

of  its  capital  was  worth  $1000,  than  if  it  had  issued 
forty  pieces  of  paper  worth  $25  each  ?  Does  anybody 
think  that  the  officers  of  the  bank  mentioned  were 
less  intent  on  profit,  because  its  capital  had  not  been 
watered?  Mr.  Lawson  and  those  who  think  as  he 
does  confound  cause  and  effect.  High  capitalization 
does  not  produce  high  profits,  but  the  experience  of  a 
certain  volume  of  profits  or  the  anticipation  thereof 
is  made  the  basis  of  the  capitalization.  Probable 
profits  are  the  foundation,  capitalization  is  the 
superstructure.  That  advertised  prognostications 
are  often  exaggerated  to  deceive  the  investing 
pubUc  does  not  alter  the  economic  theory. 

If  there  are  industrial  concerns  able  to  maintain  a 
higher  than  the  average  profit  rate,  then  it  must  be 
that  their  spheres  are  no  longer  subject  to  the  action 
of  the  agency  which  has  produced  the  average  profit 
rate, — namely,  free  competition.  There  are  two 
primary  ways  in  which  competition  manifests  itself: 
first,  by  the  transfer  of  capital  from  a  sphere  of  low 
profit  rate  to  one  of  high  profit  rate ;  secondly,  by  new 
capital  seeking  the  sphere  of  high  profit  rates  and 
neglecting  those  of  low  profit  rates.  The  first 
mentioned  movement  of  capital  became  increasingly 
difficult  with  the  ever  larger  investment  in  fixed 
capital  necessitated  by  technical  progress.  The 
other  movement  of  competitive  capital,  that  of  the 
entry  of  new  capital  into  the  more  profitable  indus- 
tries, must  also  have  met  with  an  obstacle.  The 
first  thought  to  present  itself  is  that  the  existing 
trusts  are  already  in  control  of  elements  of  monopoly. 
This  is  true  of  many  trusts,  but  even  in  the  sphere  of 


264  Capital  To-Day 

those  not  protected  by  elements  of  monopoly  we  no 
longer  see  new  capital  entering  the  field.  The  fact 
is  that  new  competition  is  prevented  by  the  concentra- 
tion of  money  capital,  to  which  the  next  chapter  will 
be  devoted. 

To  the  extent  to  which  competition  has  been 
eliminated  in  a  sphere  of  production,  that  sphere  may 
be  described  as  being  more  or  less  monopolized.  If 
any  single  organization  within  a  sphere  controls 
such  a  proportion  of  the  total  production  as  is  in- 
dispensable for  the  existing  consumption  and  there- 
fore of  material  influence  on  prices,  that  organization 
commands  a  more  or  less  monopolistic  position 
within  its  sphere. 

The  maintenance  of  a  higher  than  average  profit 
rate  clearly  is  the  result  of  the  elimination,  more  or  less 
complete,  of  competition.  This  does  not  imply  that 
monopolies  have  the  power  to  determine  their  profit 
rate  by  fixing  prices  quite  arbitrarily.  Monopolies 
may  control  production  and  prices,  but  they  cannot 
control  consumption.  All  they  can  do  is  to  contrive 
such  a  combination  of  maximum  sales  with  maximum 
prices  as  will  yield  a  maximum  profit.  Similarly 
in  buying  their  material  and  labor  power  they  cannot 
bear  down  too  heavily  on  the  sellers,  as  they  would 
otherwise  in  the  long  run  reduce  the  supplies  required. 
To  discover  what  maximum  price  consumers  think 
they  can  afford  to  spend  for  such  quantities  as  would 
prove  most  profitable  to  the  monopolies,  is  for  these 
a  process  of  experimentation.  For  example,  when 
the  elevated  railroads  in  New  York  started  on  a 
ten-cent  fare  it  was  soon  found  expedient  to  reduce  it 


Concentration  of  Industrial  Capital  265 

to  five  cents.  On  the  other  hand,  estimates  for  the 
Hudson  Tunnel  had  been  based  on  a  five-cent  fare. 
The  tunnel  proved  itself  popular  beyond  all  expecta- 
tion— a  veritable  bonanza.  It  was  now  easy  to 
ascertain  whether  the  public  would  stand  a  raise  of 
forty  per  cent.     The  fare  is  now  seven  cents. 

Certain  so-called  public  utility  or  franchise  trusts 
are  naturally  monopolies  and  control  commodities 
which  are  indispensable  and  for  which  no  substitutes 
exist.  Such  are  privately  owned  water-works,  gas 
and  electric  plants,  street  railways,  telephones,  etc. 
The  presence  of  two  telephone  systems  in  cities,  where 
they  exist,  is  considered  a  nuisance.  These  trusts 
have  been  able  to  pocket  enormous  profits  with  the 
connivance  of  the  politicians,  although  the  latter 
have  been  obliged  of  late  years,  in  order  to  appease 
popular  dissatisfaction,  to  bring  about  reductions 
of  prices  or  even  to  municipalize  or  nationalize  some 
public  services. 

Much  dissatisfaction  is  directed  also  against  the 
trusts  in  the  manufacturing,  extractive,  and  trans- 
portation industries,  and  is  mainly  nursed  by  capi- 
talists still  in  the  competitive  stage  and  by  the 
middle  class.  By  the  latter  we  mean  owners  of 
means  of  production  who  perform  productive  labor, 
either  alone  or  with  the  assistance  of  wage- workers, 
and  are  thus  not  advanced  to  mere  commandership 
of  labor.  The  great  bulk  of  this  middle  class  is 
composed  of  farmers.  To  these  strata  of  society 
"monopoly"  is  a  term  of  reproach,  and  if  they  know 
anything  about  themselves,  it  is  that  they  are 
"anti-monopolists."     They  are  always  hopeful   of 


266  Capital  To-Day 

action  against  trusts  by  legislation  and  government 
suits,  disappointed  when  these  have  remained  with- 
out effect,  and  astonished  when  they  have  even 
resulted  in  further  concentration,  as  when  the  dis- 
solution of  the  Oil  Trust  resulted  in  a  reduction  of 
the  number  of  the  stockholders  by  14,142  between 
June  30,  1912,  and  June  30,  191 3.  The  impressions 
of  these  social  strata  are  determined  by  the  way  mon- 
opoly affects  them ;  a  real  understanding  of  the  histori- 
cal significance  of  industrial  monopolization  in  our 
generation  would  interfere  with  their  defense  of  their 
interests  as  they  understand  them.  But  the  working 
class,  having  a  historical  mission,  is  eminently  in- 
terested in  acquiring  that  understanding. 

Competition  pre-supposes  a  fairly  equal  opportu- 
nity between  economic  rivals,  a  disadvantage  in  one 
respect  being  sometimes  offset  by  an  advantage  in 
another  respect.  Such  an  equilibrium  of  forces  is 
in  constant  danger  of  being  upset.  The  advantages 
constantly  sought  and  often  gained  by  some  of  the  com- 
petitors are  apt  to  lead  to  the  permanent  discom- 
fiture of  others,  because  such  advantages  are  of  the 
nature  of  at  least  temporary  monopoly.  The  whole 
capitalist  system  of  production,  built  up  on  the  founda- 
tion of  free  competition,  is  a  process  of  elimination 
of  competition  and  of  attainment  of  monopoly.  Every 
accumulation  of  capital  from  profit,  every  new  pro- 
cess or  new  machine,  before  coming  into  general  use, 
was  a  step  in  the  direction  of  monopoly.  Every 
partnership  eliminated  competition  between  two 
capitalists,  and  the  advantage  gained  by  them  in  the 
volume  of  their  capital  and  in  the  blending  of  their 


Concentration  of  Industrial  Capital  267 

respective  capacities  interfered  with  the  competi- 
tion of  others.  The  corporation  was  an  extension  of 
the  principle  of  monopoly.  The  stage-coach  and  the 
freight-dray  were  tools  open  to  competition;  the 
railway  is  naturally  a  monopoly.  The  charters 
granted  to  corporations  by  the  state  are  recognitions 
of  economic  facts  already  accomplished  by  society. 
The  state  itself,  as  Moody  points  out,  is  a  monopoly 
which  abolished  physical  competition  with  fists  and 
clubs.  The  more  perfect  social  monopoly  of  the 
future  will  stand  in  the  same  relation  to  present-day 
economic  competition,  as  the  present  state  stands 
to  physical  competition  during  savagery.  The 
unconscious  tendency  of  human  evolution  has  been 
to  weld  the  race  into  an  organism,  and  a  perfect 
organism  is  a  perfect  monopoly. 

In  the  face  of  such  a  fundamental  tendency  it  is 
clear  that  all  anti-trust  legislation  and  judicial 
prosecution  of  trusts  must  prove  to  be  futile  in  the 
future,  as  they  have  been  in  the  past.  The  class 
of  individual  capitalists,  which  now  advocates  such 
measures,  had  a  great  deal  to  say  when  the  hand-loom 
weavers  destroyed  the  first  power-looms.  These 
machines  were  economizers  of  labor,  certainly,  but 
so  are  the  trusts  with  their  large  scale  production  by 
the  most  improved  processes,  in  the  most  favorable 
localities;  their  control  of  the  production  of  their 
materials;  their  industrial  utilization  of  waste  pro- 
ducts ;  their  annexation  of  accessory  industries ;  their 
general  elimination  of  waste.  When  the  Match  Trust 
was  organized  by  a  consolidation  of  thirty-one  plants, 
eighteen   of  them  were   closed  and    the   remaining 


268  Capital  To-Day 

thirteen  supplied  the  country.  In  June,  1914,  the 
formation  of  an  international  Thermos  Bottle  Trust 
was  reported;  the  glass  parts  were  to  be  made  in 
Germany,  the  metal  parts  in  the  United  States. 
This  evidently  means  that  the  English  and  Canadian 
factories  are  to  be  closed.  To  the  anti-trust  capi- 
talists the  difference  between  the  introduction  of  the 
power-loom  and  of  the  trust  resolves  itself  into  the 
question :  whose  cow  is  gored  ?  Let  these  gentlemen 
formulate  a  law  which  on  the  one  hand  does  not 
interfere  with  the  juridical  property  rights,  to  which 
they  are  wedded,  and  on  the  other  hand  permits  the 
conduct  of  an  enterprise  to  its  best  advantage, — ■ 
a  principle  in  which  they  likewise  profess  to  believe. 

Now,  what  are  the  economic  relations  between  the 
monopolies,  the  competitive  capitalists,  and  the 
workers  ? 

The  value  added  to  the  materials  by  labor  in  a 
given  time,  as  a  year,  is  a  definite  quantity. 

Subtraction  from  the  sum  of  this  value  of  the  sum 
of  wages  paid  gives  the  sum  of  surplus-value. 

Division  of  the  sum  of  surplus-value  by  the  sum 
of  the  capital  gives  the  profit  rate. 

These  arithmetical  rules  are  the  explanation  why 
the  general  profit  rate  might  be  say  30  or  40%  and 
is  not  5%  or  100%.  The  prevalent  notion  that 
competition  regulates  the  profit  rate  is  the  result  of 
ignorance  of  the  theory  of  value.  This  matter  has 
already  been  referred  to  in  Chapter  IX.,  where  it  is 
shown  that  competition  only  accounts  for  oscillations 
of  prices  from  value,  but  not  for  value  itself.  Com- 
petition does  not  create  the  profit  rate,  but  only 


Concentration  of  Industrial  Capital  269 

equalizes  it  first  within  a  sphere  and  then  between 
spheres  of  production.  The  essential  point  to  com- 
prehend is  that  profit  is  not  just  something  tacked  on 
to  the  price,  but  a  definite  quantity. 

As  the  total  new  value  created  by  labor  regulates 
the  total  surplus-value,  it  follows  that  the  law  of 
value  limits  the  total  price  at  which  the  commodities 
are  sold.  This  price  is  therefore  the  capitalistic 
production  price  which  includes  the  unpaid  labor. 
The  proportion  of  the  latter  to  the  paid  labor  varies 
among  the  different  industries,  but  the  rate  of  surplus 
labor  performed  in  each  is  left  out  of  account  in 
capitalist  society  which  apportions  profits  not  pro 
rata  of  labor  performed,  but  pro  rata  of  capital 
employed.  Hence  the  deviations  of  prices  of  in- 
dividual commodities  from  their  values,  as  illus- 
trated in  Chapter  IX.  The  plus  and  the  minus  of 
prices,  relative  to  value,  balance  each  other,  and  the 
total  price  equals  the  total  value. 

The  total  value  added  to  materials  forms  the 
revenue  of  the  people,  one  part,  in  the  form  of  wages, 
going  to  the  workers  in  payment  of  the  value  of  their 
labor  power;  the  other  part,  in  the  form  of  profit 
(including  interest),  being  divided  by  the  capitalists, 
who  surrender  a  portion  of  the  profit  to  the  land- 
owners in  ground  rent. 

Since  the  revenue  of  the  capitalists  collectively  is 
thus  a  definite  quantity,  it  follows  that  if  some 
among  them  manage  to  appropriate  more  than  the 
share  due  them  according  to  the  general  profit  rate, 
others  must  receive  correspondingly  less. 

The  single  concerns  differ  from  each  other  greatly 


270  Capital  To-Day 

in  size  and  efficiency.  We  have  shown  elsewhere 
(Chapter  X.)  from  census  figures  and  logical  inference 
therefrom  that  about  i%  of  the  number  of  manu- 
facturing concerns  produce  50%  of  the  total  value. 
But  this  1%  includes  both  the  firm  having  a  produc- 
tion of  one  million  dollars  and  the  Steel  Trust  with  a 
production  of  800  milHon  dollars.  That  the  numeri- 
cal predominance  of  the  smaller  concerns  in  the  1% 
is  enormous  goes  without  saying,  and  the  fact 
emphasizes  the  almost  infinitesimal  relative  small- 
ness  numerically  of  the  large  trusts.  Concerning  the 
caHbre  of  the  other  99%  of  concerns,  producing  the 
other  50%  of  value,  we  need  not  lose  any  words. 

The  products  of  all  of  these  concerns,  large  or 
small,  may  be  ranged  for  the  purpose  of  theoretic 
economics  into  two  classes :  one  consisting  of  articles 
of  productive  consumption,  the  other  consisting  of 
articles  of  individual  consumption. 

Articles  of  the  first  mentioned  class  are  sold  by  one 
capitalist  to  the  other  either  to  serve  permanently 
as  fixed  capital  or  to  be  converted  into  articles  of 
individual  consumption. 

The  second  class  of  articles  is  sold  directly  to  the 
individual  consumers. 

As  the  productiveness  of  labor  increases,  the  value 
of  commodities  decreases.  The  competing  capi- 
talists sell  at  the  decreased  value.  But  not  so 
necessarily  the  monopolies.  Not  that  these  have  it 
in  their  power  to  make  a  fool  of  the  law  of  value. 
The  totality  of  all  commodities  cannot  be  sold  above 
their  value  by  one  cent.  The  monopoly's  products 
are  included  therein,  and,  in  order  to  be  sold,  cannot 


Concentration  of  Industrial  Capital  271 

appeal  to  anything  else  than  the  definite  income  of  the 
people. 

But  what  the  law  of  value  permits  the  monopolies 
to  do  is  to  enforce  an  unequal  division  of  the  social 
surplus  value  as  between  themselves  and  the  competi- 
tive capitalists.  This,  of  course,  is  a  violation  of  the 
time-honored  principle:  for  equal  capital  equal 
profit.  But  the  monopolies  proclaim  a  new  principle : 
one  average  rate  of  profit  for  monopolies,  another 
average  rate  of  profit  for  competitive  capital. 

If  a  monopoly  produces  articles  for  productive 
consumption,  it  can  fix  its  prices  at  such  a  high  level 
as  to  leave  to  the  converting  industrialist  only  a 
scant  margin  between  his  cost  of  production  and  the 
value  of  his  finished  product.  This  proceeding  would 
be  impossible,  if  the  view  were  not  erroneous  that 
the  source  of  profit  is  in  the  simple  addition  of  a 
percentage  to  the  cost  price.  Commodities  are  sold 
at  their  value.  In  selling  articles  for  productive 
consumption  above  their  value,  the  monopoly 
realizes  not  only  the  surplus  value  produced  by  its 
own  workers,  but  appropriates  part  of  the  surplus 
value  which  is  to  be  produced  by  the  workers  of 
the  converting  capitalist. 

Supposing,  however,  that  a  monopoly  product 
constitutes  so  large  an  element  of  the  cost  of  the 
finished  article  of  individual  consumption  as  to 
nullify  in  a  given  converting  industry  even  the 
reduced  average  profit  rate  of  competitive  capital, 
then  only  two  solutions  of  the  questions  are  possible : 
Either  it  is  the  purpose  of  the  monopoly  to  drive  a 
particular  division  of  converting  capitalists  out  of 


2^2  Capital  To-Day 

business  entirely  and  to  annex  this  branch  of  industry ; 
or  such  a  division  of  hard-pressed  capitahsts  suc- 
ceeds in  its  turn  in  selling  its  finished  products  above 
their  value.  This  is  only  possible  at  the  expense  of 
the  prices  of  other  products  into  whose  cost  the 
monopoly  price  of  the  materials  enters  as  a  less 
important  element.  For  example:  both  groups  of 
competitive  capitalists  have  an  average  cost  of  80, 
an  average  profit  of  20,  selling  at  100  each,  or  200 
for  both.  Now  the  cost  for  group  A  is  raised  by  the 
monopoly  to  90  and  this  group  manages  to  sell  at 
105.  But  the  social  revenue  available  for  both 
groups  being  only  200,  group  B  is  compelled  to 
reduce  its  price  to  95.  The  general  profit  rate  for 
competitive  capital  still  rules,  but  has  been  reduced 
from  20  to  15.  One  group  of  competitive  capitalists 
has  been  able  to  shift  part  of  its  oppression  on  to  the 
other  group,  so  that  all  are  in  the  end  squeezed  by  the 
force  of  monopoly  against  the  stone  wall  of  the  law 
of  value. 

Here  it  might  occur  to  somebody  that  the  capi- 
talists of  a  particular  country  might  find  an  escape 
from  this  law  by  giving  only  part  of  their  products 
for  the  whole  available  revenue  and  exporting  the 
balance.  But  it  does  not  require  much  thinking  to 
perceive  that  even  if  the  capitalists  of  one  country 
could  thus  circumvent  the  law  of  value,  the  whole 
international  class  of  capitalists  cannot.  However, 
the  mere  exchange  of  values  with  a  foreign  country 
does  not  alter  the  situation  for  the  single  country  in 
the  least.  And  in  such  cases  where  products  are 
exported,   not  as  merchandise,  but  as  capital  for 


Concentration  of  Industrial  Capital  273 

foreign  investment,  like  steel  rails  and  locomotives 
in  lieu  of  money,  the  only  difference  is  that  the 
equivalent  will  return  gradually  as  profit,  instead  of 
immediately.  The  foreign  products,  whether  re- 
ceived in  the  exchange,  or  representing  profit  on  the 
investment,  are  subject,  as  regards  their  prices 
and  their  economic  effects  on  the  different  classes 
of  consumers,  to  the  same  laws  as  the  domestic 
products. 

The  competitive  capitalists  are  unable  to  turn  the 
tables  on  the  monopoly  in  cases  in  which  they  are 
themselves  the  producers  of  primary  materials  and 
the  monopoly  is  the  converter,  because  of  their 
disadvantageous  position  as  competitors. 

From  the  forgoing  consideration  of  the  trusts,  in  so 
far  as  they  are  producers  of  articles  of  productive 
consumption,  it  appears  that  their  extra  profits  are 
entirely  the  result  of  a  new  adjustment  within  the 
capitalist  class  in  relation  to  the  division  of  the 
surplus-value,  although  they  may  be  reflected  for 
different  consumers  of  different  finished  products 
in  contrary  price  movements,  balancing  each  other. 

We  shall  now  consider  the  effect  of  the  maintenance 
of  artificially  high  prices  by  trusts  producing  articles 
of  individual  consumption. 

If  a  trust  sells  such  articles  through  merchants,  it 
can  apply  to  them  the  same  tactics  as  practiced 
toward  the  productive  capitalists,  even  to  the  extent 
of  prescribing  to  the  merchants  the  exact  prices  at 
which  they  must  sell  the  trust's  products,  practically 
reducing  them  to  the  position  of  commission  salesmen. 
If  a  trust  sells  directly,  eliminating  the  merchant,  it 
18 


274  Capital  To-Day 

will  first  of  all  pocket  the  merchant's  profit;  in  the 
second  place  it  will  be  able  in  many  instances  to  sell 
its  products  above  their  value,  which  is  only  possible, 
as  we  know,  to  the  corresponding  detriment  of  the 
prices  of  other  products. 

Such  instances,  may,  nevertheless,  produce  certain 
important  economic  effects,  depending  on  whether 
the  overpriced  products  enter  generally  into  the 
consumption  of  the  capitalists  or  into  that  of  the 
workers. 

If  consumed  by  the  industrial  capitalist,  whose 
profit  had  already  been  cut  by  a  trust,  he  finds  him- 
self mulcted  again,  when  purchasing  the  kinds  of 
goods  consumed  by  his  class.  He  must  lower  his 
standard  of  life  or  live  on  a  scale  not  warranted  by  his 
income.  That  the  latter  takes  place  largely  is  shown 
by  the  alarming  increase  of  loans  by  life  insurance 
companies  to  their  policyholders.  ^ 

'The  New  York  Press,  December  1 6,  19 13,  contained  the  follow- 
ing: 

"There  is  no  more  telling  indication  of  the  heavy  spendings  of 
Americans  [which  Americans?]  than  the  showing  that  borrowing  of 
money  on  life  insurance  policies  is  constantly  increasing,  till  it  has 
come  to  alarm  insurance  executives.  In  1888  these  loans  aggregated 
only  3i  per  cent,  of  the  reserves  of  the  companies;  in  19 12  this  had 
advanced  to  16.03  per  cent,  and  1913  will  make  a  record  of  about 
18  per  cent. 

"The  convention  of  life  insurance  presidents  has  given  serious 
attention  to  these  conditions.  The  reserves  of  the  companies 
S'ggregate  nearly  four  billions  of  dollars,  on  which  loans  of  18 
per  cent,  would  be  ^720,000,000.  The  insurance  policy  on  which 
money  is  borrowed  is  invalidated  in  the  proportion  that  loan  bears 
to  the  amount  which  has  been  paid  in  on  the  policy.  Therefore  a 
vast  share  of  the  insurance  nominally  in  force  is  in  fact  affording  no 
protection  at  all.     Moreover,  it  was  stated  that  when  once  a  policy- 


Concentration  of  Industrial  Capital  275 

In  a  similar  situation  are  those  capitalists  whose 
revenue  is  not,  or  only  very  remotely,  influenced  by 
particular  profit  rates,  but  is  a  fixed  quantity.  The 
extra  profit  of  the  trust  is  a  clear  deduction  from  their 
share  in  the  social  surplus  value.  To  this  group 
belong  capitalists  whose  money  is  invested  at  fixed 
rates  of  interest;  a  large  element  of  other  non- 
producers  with  otherwise  fixed  incomes;  the  land- 
owners, and  the  owners  of  rented  houses  and  other 
buildings.  The  "landlords"  appear  in  the  dual 
character  of  landowners,  receiving  ground  rent, 
and  capitalists,  receiving  interest  on  a  commodity 
(houses)  as  the  equivalent  of  money. 

The  case  is  different  as  regards  any  overpriced  prod- 
ucts which  enter  into  the  consumption  of  the  workers. 

In  the  first  place  such  products  may  be  inexpensive 
things,  like  pipe-tobacco,  matches,  etc.,  of  not  much 
importance  in  a  worker's  budget,  although  the  total 
mass  consumed  affords  spheres  for  the  existence  of 
important  trusts.  But  presuming  that  trusts,  com- 
manding the  necessaries  of  life,  were  generally  or 
very  extensively  to  raise  prices  artificially,  would  the 
workers  be  in  the  same  helpless  situation  as  the  social 
groups  enumerated  in  the  previous  paragraph? 

holder  takes  out  a  loan,  experience  shows  that  in  only  one  case  in 
ten  does  he  ever  repay  that  loan. 

"  It  is  recognized  by  the  life  insurance  men  that  if  this  tendency 
shall  continue  confidence  in  insurance  will  be  lost.  Very  many 
men,  it  is  explained,  make  loans  on  their  policies  without  their 
families  knowing  of  the  thing.  At  death,  therefore,  the  facts  are 
recalled  by  those  who  expected  to  be  the  beneficiaries.  That  kind 
of  experience  is  certain  to  injure  the  repute  of  insurance  as  a  protec- 
tion to  the  family." 


276  Capital  To-Day 

The  answer  is :  the  necessaries  of  Hf e  are  so  to  say 
the  raw  material  for  the  reproduction  of  labor  power. 
The  latter  is  a  commodity  selling,  like  every 
other,  at  its  value  or  the  cost  of  its  reproduction. 
This  cost  depends  on  the  price  of  those  necessaries 
of  life  which,  as  the  result  of  history,  climate,  etc., 
have  become  second  nature  to  the  workers  and  are 
therefore  considered  indispensable  by  them.  If  the 
necessaries  of  life  advance,  wages  follow.  Until 
wages  have  caught  up  with  prices,  the  price  of  labor 
power  is  temporarily  below  its  value,  the  same  as  it 
occasionally,  under  particularly  favorable  circum- 
stances, rises  temporarily  above  its  value. 

Given,  however,  a  condition  in  which  wages  have 
advanced  as  much  or  even  somewhat  more  than 
prices  of  industrial  products,  though  much  less  than 
agricultural  products  and  rent,  then  there  has  taken 
place  a  decline  of  the  value  of  labor  power,  or  in  other 
words  a  lowering  of  the  worker's  standard  of  life. 

That  the  huge  profits  of  trusts  and  other  large 
corporations  are  not  made  at  the  expense  of  the 
consumers,  as  a  body,  is  not  only  a  necessary  theoreti- 
cal conclusion,  but  is  practically  proven  by  the 
comparatively  slight  rise  of  the  prices  of  manu- 
factured articles,^  which  are  precisely  the  products 
fashioned  from  materials  largely  controlled  by 
trusts.  Even  this  slight  rise  has  been  accounted 
for  by  other  factors.  * 

But  confronting  these  huge  profits  with  the 
enormous  general  rate  of  exploitation  of  the  workers, 

'  Refer  to  figures,  p.  103. 

^  Refer  to  inquiry  into  rising  prices  p.  104. 


Concentration  of  Industrial  Capital  277 

the  calculation  of  which  we  presented  in  Chapter 
VIII.,  and  remembering  that  the  trusts  appropriate 
part  of  the  other  capitalists'  share  of  the  surplus  value 
in  addition  to  their  own,  we  find  that  both  sets  of 
figures  go  far  in  confirming  each  other.  They 
reveal  the  real  source  of  the  growing  power  of  concen- 
trated industrial  capital. 

From  the  forgoing  analysis  it  appears  that  the 
sting  of  the  trust  movement  is  directed  against  the 
competitive  capitalists,  productive  and  mercantile. 
This  movement  for  the  further  extension  of  the 
trusts  tends  to  the  final  elimination  of  competition 
and  to  reducing  the  remaining  capitalists  to  mere 
functionaries,  though  left  nominally  independent. 
When  that  consummation  is  reached,  the  mainte- 
nance of  the  average  profit  rate  becomes  an  issue 
between  the  trusts  themselves,  as  those  among  them 
producing  indispensable  necessaries  of  life  might 
extort  a  higher  than  average  rate  of  profit.  This,  we 
now  understand,  they  could  only  do  at  the  expense 
of  the  capitalists  of  other  trusts  who  likewise  must 
realize  their  profit  out  of  the  same  common  revenue 
fund  of  the  workers  and  capitalists,  the  strictly 
limited  total  of  wages  and  surplus  value.  Such 
violation  of  the  sacred  principle  of  equality  of  every- 
thing that  bears  the  countenance  of  capital  capitalist 
society  must  find  the  means  of  preventing,  as  it  has 
always  endeavored  to  do.  Indeed,  the  economic 
power  that  will  ultimately  enforce  a  uniform  profit 
rate  among  the  industries  already  exists — the  cen- 
tralized money-power  which  forms  the  subject  of  the 
next  chapter. 


278  Capital  To-Day 

So  long  as  capitalist  society  has  not  passed  the 
zenith  of  its  expansibility  and  until  the  centralized 
economic  power  of  the  capitalist  class  rules  absolutely 
the  economic  life  of  nations,  the  value  of  labor 
power  remains  unaffected  by  the  process  of  mon- 
opolization. And  as  it  is  a  historic  necessity  that 
capitalism  shall  largely  work  out  its  inherent  ten- 
dency, the  workers  have  no  economic  reason  for 
supporting  the  anti-trust  action  of  the  small  capitalists 
and  the  middle  class.  Monopolies  being  the  out- 
growth of  competition,  they  had  to  become  private 
monopolies  managed  for  the  benefit  of  private 
interests,  as  opposed  to  any  outside  interest.  Why 
do  not  the  anti-monopoly  capitalists  advocate 
advancing  to  the  next  step  of  evolution,  social 
monopoly?  Why  rather  "bust  the  trusts"?  The 
reason  is  that  these  little  capitalists  are  back  numbers 
and  hope  to  save  themselves  by  turning  back  the 
hands  on  the  dial  of  time. 

Competition  will  continue,  as  in  the  past,  to  breed 
monopolies.  For  this  it  is  not  necessary  that  com- 
petition in  an  industry  be  carried  to  its  logical  end, 
the  single  survivor.  Men  are  sensible  beings  and 
combine  into  a  monopoly  before  great  destruction  of 
capital  ensues  from  a  final  struggle  between  Titans. 
Before  this  desperate  pass  is  reached  monopolies 
are  brought  about  by  almost  any  available  means. 
These  have  often  been  of  worse  than  questionable 
nature,  ranging  from  the  morally  reprehensible  to 
the  downright  criminal.  But  all  history  is  replete 
with  just  such  facts,  and  it  is  only  when  the  strife 
is  over  and  men  are  able  to  look  backwards  after  a 


Concentration  of  Industrial  Capital  279 

long  time  that  history  seems  to  justify  the  means 
by  the  end  attained.  So  it  is  also  with  the  unlovable 
personality  of  the  pioneers  of  monopoly  who  are 
personally  made  the  object  of  unfavorable  criticism. 
They  are,  it  is  true,  typical,  at  least  in  America,  of 
the  class  of  men  described  by  James  Bryce  in  these 
words ' :  "  In  no  country  does  one  find  so  many  men 
of  eminent  capacity  for  business,  shrewd,  forcible, 
and  daring,  who  are  so  uninteresting,  so  intellectually 
barren,  outside  the  sphere  of  their  business  knowl- 
edge." The  purpose  of  these  men  is  to  work  for 
their  personal  advantage,  but  in  the  end  their 
activities  will  have  had  the  effect  of  making  possible 
the  production  of  great  wealth  at  a  minimum  of 
labor. 

The  corporation  is  the  abolition  of  capital  as 
private  property  within  the  limits  of  the  capitalist 
system  of  production.  The  function  of  capital  is 
divorced  from  its  ownership,  and  profit  presents 
itself  as  the  plain  appropriation  of  the  surplus  labor 
of  others.  Theoretically  the  highest  development 
of  the  capitalist  system  of  production  would  be 
reached  with  the  universal  holding  company,  or 
trust  of  trusts,  and  with  it  the  end  of  anarchy  and 
money.  But  inasmuch  as  the  development  of  the 
monetary  system  proceeds  at  a  much  quicker  rate 
than  that  of  industrial  concentration,  the  strain  on 
the  former  will  become  acute  before  the  culmination 
of  the  latter  is  reached.  The  present  social  system 
will  thus  become  untenable  before  it  can  com- 
pletely work  out  its  logical  ultimate  consequences  in 

'  American  Commonwealth,  part  iv.,  chap.  8i. 


28o  Capital  To-Day 

the  realm  of  industrial  organization.  However, 
concentration  in  most  industries  is  even  now 
sufficiently  advanced  for  their  re-transfer  to  the 
producers. 

These  most  concentrated  industries  are  at  the  same 
time  the  fundamental  industries  on  which  all  others 
depend  for  the  means  of  production,  such  as  coal, 
iron,  petroleum,  natural  gas,  copper,  electric  works, 
heavy  machinery,  chemicals,  railroads,  etc.  The 
direct  socialization  of  these  industries  would  have  the 
effect  of  indirect  socialization  of  the  scattered  smaller 
industries,  largely  producing  articles  of  individual 
consumption,  as  well  as  of  agriculture. ' 

*  Little  reference  has  been  made  to  agriculture  in '  these  pages. 
Others  have  specialized  in  collecting  data  regarding  economic 
tendencies  in  agriculture  in  the  interest  of  economic  science.  We 
believe  that  their  painstaking  labors  are  largely  wasted.  They 
appear  to  be  animated  by  the  idea  that  the  impending  social  trans- 
formation must  wait  until  the  technical  and  economic  development 
of  agriculture  will  have  fairly  caught  up  with  the  industries  and  that 
the  social  change  will  be  one  grand  event.  But  the  preponderance 
of  reasons  favors  a  gradual  process  of  transformation,  in  so  far 
as  the  latter  depends  on  the  further  development  and  concentration 
of  the  means  of  production.  Only  the  socialization  of  the  large 
primary  industries  is  immediately  essential;  the  others,  including 
agriculture,  can  be  left  to  their  development,  profoundly  influenced 
as  they  are  bound  to  be  by  the  new  social  atmosphere. 

If,  however,  as  is  to  be  anticipated,  the  gradual  transformation 
is  crossed  and  brought  to  a  sudden  end  by  the  breakdown  of  the 
financial  mechanism,  then  it  will  be  entirely  immaterial  in  what 
stage  of  development  agriculture  and  other  backward  industries 
may  be  found  at  that  moment.  To  the  extent  that  agriculture 
produces  commodities  (and  not  for  consumption  on  the  farm),  the 
old  individualistic  system  is  inhibited  hy  force  majeure  and  must 
perforce  be  rci^laced  by  social  control  of  the  distribution  of  agricul- 
tural products  as  use-values. 


Concentration  of  Industrial  Capital  281 

Already  the  contradiction  between  the  social  nature 
of  production  and  the  private  power  of  a  few  mag- 
nates, who  are  masters  thereof,  is  challenging  the 
intervention  of  the  state.  Timidly  the  latter  essays 
control  by  boards.  But  efBcient  control  without 
ownership  is  impossible,  and,  whereas  private  owner- 
ship of  railroads,  for  instance,  was  not  questioned  a 
very  few  years  ago  by  anybody  but  the  Socialists, 
voices  are  now  heard  even  of  capitalists  of  national 
reputation  predicting  the  nationalization  of  the 
important  transportation  and  communication  indus- 
tries. On  the  floor  of  the  Senate  a  prominent 
Republican  member,  Senator  Borah  of  Idaho,  on 
July  3,  1 9 14,  said  that  "within  ten  years  we  will  face 
the  question  of  the  public  ownership  of  railroads 
because  of  the  breakdown  of  regulation."  The  busi- 
ness of  the  Express  Trust  is  being  gradually  taken 
over  by  the  Post  Office,  transfer  to  which  also  of  the 
telephone  and  telegraph  is  advocated  by  Postmaster 
General  Burleson. 

The  steam  railroads  constitute  the  largest  indus- 
trial concentration  in  the  country.  This  consists  of 
about  1040  companies,^  now  controlled  by  ten  main 
railroads  through  a  system  of  pyramiding  of  stock 
ownership,  such  as  described  above  in  relation  to  the 
Pennsylvania  Railroad,  and  also  through  long  leases. 
These  ten  companies  are:  Pennsylvania,  New  York 
Central,  New  Haven,  Southern,  Chicago  &  North- 
western, Chicago,  Milwaukee  &  St.  Paul,  Great 
Northern,  Northern  Pacific,  Union  Pacific,  and  Atchi- 

•  Truth  about  Trusts,  John  Moody,  p.  476. 


282  Capital  To-Day 

son,  Topeka  &  Santa  Fe.  Their  combined  share 
capital  is  $2,451,737,000. 

Now,  if  the  government  should  shrink  from  apply- 
ing the  fundamental  principle  enunciated  by  Justice 
Brewer  of  the  Supreme  Court  and  quoted  in  the  last 
chapter  and  deprive  the  railroads  of  their  character 
as  capital  by  simple  legislative  enactment,  there 
still  remains  another  alternative  of  the  United  States 
acquiring  ownership  of  the  railroads  without  the 
expenditure  of  a  cent. 

This  sounds  startling  to  those  who  believe  that 
corporations  have  raised  an  effectual  barrier  against 
nationalization  by  their  high  capitalization.  But 
we  have  seen  above  that  the  holders  of  the  shares 
of  ten  companies  control  the  entire  railroad  system 
of  the  country.  These  shares,  whose  market  value  in 
June,  1 9 14,  was  about  $2,700,000,000,  can  be  acquired 
by  the  government  by  condemnation  proceedings 
authorized  by  Congress.  The  constitutionality  of 
such  condemnation  has  been  expressly  affirmed  by 
the  United  States  Supreme  Court  ^ ;  moreover,  we  are 
used  to  condemnation  of  private  property  for  public 
or  quasi-public  purposes,  such  as  the  condemnation 
of  private  lands  by  the  railroads  themselves,  or  that 
of  the  land  of  Irish  landlords  by  the  government  for 
the  purpose  of  creating  peasant  proprietorship. 

The  money  to  pay  for  the  shares  could  be  easily 
raised  against  the  government's  three  per  cent, 
bonds.  The  amount  is  less  than  the  war  debt  when 
the  country's  population  was  one  third  and  its  wealth 
(real  and  fictitious)  much  less  than  a  third  of  what  it  is 

'  203  United  States,  372. 


Concentration  of  Industrial  Capital  283 

now.  The  small  interest  service  and  the  amortiza- 
tion would  for  a  time  be  a  charge  on  the  service; 
otherwise  the  railroads  could  be  operated  on  the  same 
principle  as  the  Post  Office,  that  is  for  the  benefit  of 
the  people  and  not  as  a  means  of  indirect  taxation, 
as  done  by  the  military  states  of  Europe. 

The  practical  ownership  of  the  railroads  by  the 
government  carries  with  it  the  immediate  practical 
ownership  of  the  Anthracite  Coal  Trust  owned  by 
the  coal-carrying  roads,  and  would  go  far  toward 
control  of  all  large  industries. 


CHAPTER  XII 

THE  CONCENTRATION  OF  MONEY  CAPITAL 

FIFTY  years  ago,  as  the  reader  will  remember, 
the  accumulation  of  money  capital  in  the  banks 
was  in  its  infancy.  The  figures  given  in  Chapter  VI. 
of  the  total  deposits  of  all  banks  in  the  United  States 
in  1863  are  to-day  matched  by  the  combined  deposits 
of  two  banking  establishments  in  New  York;  two 
direct  instruments  of  the  now  centralized  money 
power. 

At  that  time  the  banks  were  all  chartered  by  the 
States  on  insecure  financial  bases,  doing  generally  a 
neighborhood  commercial  lending  business,  except 
that  they  issued  paper  money  which  had  a  habit  of 
depreciating  more  or  less.  Besides  the  commercial 
banks  there  were  savings  banks,  investing  their 
funds  in  real  estate  mortgages,  then  the  only  safe 
investment,  as  the  new-fangled  railroad  securities 
were  still  in  the  experimental  stage. 

Aside  from  the  commercial  and  savings  banks  the 

only    accumulations    of    consequence    of    loanable 

capital  were  in  the  life  insurance  companies,  which, 

like   the   savings   banks,    invested   mainly   in   real 

estate  mortgages.      From  $1,000,000  in    1843   their 

assets  had  grown  to  $125,000,000  in  1867  (the  year 

284 


Concentration  of  Money  Capital     285 

in  which  the  first  vohime  of  Capital  was  pub- 
Hshed),  yet  nobody  could  have  foreseen  that  it 
would  be  particularly  this  kind  of  bank  which,  with 
billions  of  assets,  would  some  day  form  one  of  the 
main  supports  of  the  centralized  money  power. 

This  great  power,  for  which  there  docs  not  yet  even 
exist — so  recent  is  its  histor}^  and  so  little  understood 
its  scope — a  generally  accepted  name,  being  variously 
designated  as  "Money  Trust,"  "Money  Power," 
"The  System,"  "Financial  Capital, "  etc.,  has  its 
seat  in  "Wall  Street,"  an  abbreviated  appellation 
of  the  financial  district  of  New  York  City.  There 
are  its  great  banks,  with  treasure  which  can  be  de- 
fended on  the  instant  by  an  impenetrable  wall  of 
burning  steam,  like  Brunhilde  on  her  rock.  And 
there  is  the  other  outfit,  indispensable  for  the  pres- 
ent, the  stock  exchange,  wdth  which  is  connected 
the  only  open  money  market  in  the  United  States. 

This  district  has  become  what  it  is,  because  it  had 
been  previously  the  business  section  of  the  dry- 
goods  importers,  the  wealthiest  class  of  merchants 
in  the  most  important  seaport.  They  graduated 
as  naturally  into  financiers  under  then  existing  condi- 
tions, as  at  one  time  the  Italian  goldsmiths  in  London, 
from  being  buyers  of  bullion,  graduated  into  that 
city's  bankers. 

About  the  middle  of  last  century  the  textile  indus- 
try was  still,  as  it  had  been  for  a  centur\%  the  most 
important  industry  of  Europe  and  the  importation 
of  dry-goods  was  the  most  aristocratic  business 
in  this  country-.  That  was  before  the  metal  industry, 
which  furnishes  our  machine^^^  railroads,  telegraphs, 


286  Capital  To-Day 

steamships,  bridges,  tubes,  skyscrapers,  assumed 
for  modern  nations  greater  importance  than  the 
mere  providing  of  raiment. 

At  that  time  the  money  for  building  the  numerous 
short  Hnes  of  railroad  had  been  gathered  partly 
from  local  banks  and  private  hoards,  but  mainly 
from  subsidies  by  local  communities — states,  counties, 
and  municipalities.  Little  of  it  was  to  be  had 
abroad.  The  total  foreign  holdings,  including  State, 
railroad,  and  other  bonds,  were  estimated  to  have 
amounted  in  1854  to  only  200  milHons,  and  in  1857 
to  400  millions,  as  against  an  estimate  of  six  billions 
now.  In  the  latter  year  a  panic  broke  out  in  which 
every  single  bank  in  the  United  States  stopped  pay- 
ment, and  it  became  necessary  to  export  gold  instead 
of  papers. 

But  then  came  the  Civil  War  and  during  its  course 
the  government  had  to  borrow  heavily,  the  debt 
rising  from  65  millions  in  i860  to  its  maximum  of 
2845  milHons  in  1865.  A  great  part  of  the  money 
had  to  be  raised  abroad.  The  exportation  of  govern- 
ment bonds  was  of  course  effected  from  the  principal 
port.  New  York,  and  the  agency  naturally  fell  to  the 
dry-goods  importers,  the  men  with  the  most  influen- 
tial foreign  connections  and  equipped  with  the  best 
understanding  of  international  finance.  They  were 
the  more  willing  to  undertake  the  commerce  of  bond 
exportation,  as  the  defection  of  the  prosperous  South 
had  crippled  their  dry-goods  business.  Prominent 
among  these  importers  were  the  houses  of  Morgan 
and  of  Peabody,  names  now  identified  respectively 
with  the  leadership  of  the  inner  group  of  the  money 


Concentration  of  Money  Capital     287 

power  and  one  of  its  most  direct  and  important 
allies.  The  dry-goods  men,  who  meanwhile  had  also 
assumed  the  management  of  the  life  insurance 
companies,  were  now  metamorphosed  into  "private 
bankers." 

In  1863  the  National  Bank  act  was  passed  for  the 
purpose  of  superseding  the  State  bank  circulation 
by  a  circulation  based  on  ownership  of  United 
States  bonds,  thereby  creating  a  market  for  the 
latter.  The  chief  agency  for  the  sale  of  its  bonds  to 
the  new  national  banks  had  been  entrusted  by  the 
government  to  the  banking  house  of  Jay  Cooke  & 
Co.,  who,  however,  heavily  involved  in  railroads, 
failed  in  1873.  Associates  of  Cooke  started  business 
for  themselves,  organized  formally  as  a  national 
bank,  but  actually  rather  as  a  partnership  with  a  few 
silent  partners.  This  was  the  First  National  Bank 
of  New  York,  to  which  went  logically  the  domestic 
bond  trade  of  the  failed  firm  of  Cooke.  Its  guiding 
spirit  was  then,  as  it  is  to-day,  George  F.  Baker,  one 
of  the  triumvirate  now  in  active  control  of  the  nation's 
economic  life. 

The  year  1879  is  memorable  in  that  it  saw  the 
cessation  of  government  bond  issues,  the  resumption 
of  specie  payment,  and  the  consolidation  of  the 
Standard  Oil  Co.  These  events  produced  a  change 
in  the  character  of  Wall  Street.  Hitherto  mainly 
the  national  market  for  speculation  in  the  value 
relation  of  gold  and  paper  tokens,  it  now  turned  its 
attention  to  shares  in  industrial  corporations.  It 
was  the  beginning  of  the  movement  toward  the 
control  of  industry  from  this  center. 


288  Capital  To-Day 

"Competition  is  the  life  of  trade"  was  the  motto 
of  the  industrial  capitalist  of  yore.  He  said  this 
with  much  glee  when  he,  as  the  only  buyer,  met 
several  sellers,  but  he  said  it  with  a  sigh  when,  one 
among  several  sellers,  he  met  one  buyer.  As  we 
now  look  back,  we  can  clearly  see  that  the  general 
formula  of  the  process  of  concentration  has  been 
"From  competition  via  threatening  ruin  or  actual 
bankruptcy  to  combination," — exactly  as  predicted 
by  Marx  nearly  half  a  century  ago. 

The  principle  that  "competition  is  impossible 
where  combination  is  possible,"  to  use  the  words 
of  Stephenson,  the  inventor  of  the  locomotive,  was 
worked  out  in  practice  mainly  by  two  men,  J.  Pierpont 
Morgan  and  John  D.  Rockefeller,  the  former  starting 
from  the  railroad  business,  the  latter  from  the  extrac- 
tion and  refining  of  petroleum. 

"A  double-track  railroad  costs  not  more  than 
two  thirds  as  much  as  two  single-track  roads.  It  will 
do  four  times  as  much  work."'  Consequently  in 
building  competing  single-track  roads,  instead  of 
double  tracking  existing  ones,  five-sixths  of  the 
capital  is  wasted.  Nevertheless  the  railroads  were 
built  preferably  single-track,  for  in  the  United 
States,  from  historical  reasons,  the  fetichism  of  free 
competition,  and  capitalistic  anarchy  generally, 
was  more  rampant  than  it  ever  was  or  could  have 
been  in  any  other  country.  Enlightened  men  knew 
that  low  prices  can  come  only  from  efficiency,  but  the 
Interstate  Commerce  Act,  passed  in  1887,  bade  the 
roads  compete  to  the  utmost,  the  expectation  having 

I  John  Moody  and  G.  K.  Turner  in  McClure's,  June,  191 1,  p.  188. 


Concentration  of  Money  Capital     289 

been  that  low  prices  would  come  from  competition 
even  between  inefficients. 

By  the  bankruptcy  of  the  railroads  in  1893,  their 
control  fell  at  once  largely  into  the  hands  of  two  small 
sets  of  men  grouped  around  Morgan  and  Rockefeller. 
Somebody  had  to  pick  up  the  wreckage.  The  people 
of  the  United  States,  who  had  always  been  convinced 
that  the  state  is  only  good  for  the  job  of  night  watch- 
man, would  not  have  accepted  the  railroads  as  a 
gift.  So  the  property  was  thrust  at  Morgan  and  the 
Rockefeller  group. 

The  latter  represented  the  first  important  American 
accumulation  of  money  capital.  Before  the  exist- 
ence of  the  Standard  Oil  Co.  the  great  sources  of 
capital  had  been  England,  Germany,  and  Holland, 
mainly  the  first-mentioned  country.  With  a  clear 
vision  of  the  advantages  which  would  accrue  to 
possessors  of  money  from  the  progressive  bankruptcy 
of  competing  refiners  and  railroads.  Rockefeller 
always  kept  a  large  part  of  the  company's  profits  in 
the  shape  of  money.  Poverty-stricken,  competitive 
railroads,  in  need  of  cash,  could  be  beaten  into  grant- 
ing secret  freight  rates  which  put  the  competing 
refiners  out  of  business.  These  were  then  bought 
out  by  the  trust  at  bargain  prices.  When  the  time 
came,  the  trust,  its  large  cash  funds  united  with 
those  of  the  National  City  Bank,  its  creation  in 
association  with  James  Stillman,  then  as  now  the 
largest  bank  in  the  country,  and  aUied  with  Kuhn, 
Loeb  &  Co.  by  the  initiative  of  Harriman,  was  ready, 
under  the  latter' s  leadership,  to  acquire  control  of  a 
large  part  of  the  bankrupt  railroads  by  purchases  of 
19 


290  Capital  To-Day 

their  stocks.  This  was  not  as  difficult  an  under- 
taking as  might  be  supposed.  Of  the  capitaHzation 
of  the  railroads  about  one  half,  the  bonds,  represented 
nominally  debt,  the  other  half,  the  stock,  nominally 
ownership.  This  stock  could  then  generally  be 
bought  at  from  a  quarter  of  its  par  value  down  to 
very  little.  For  reasons  already  stated  in  the  last 
chapter  (mainly  the  supineness  of  the  scattered 
stockholders)  it  was  deemed  sufficient  for  control 
to  command  fifteen  to  at  most  thirty  per  cent,  of 
the  stock.  It  follows  that  a  sum  of  money  equal  to 
from  two  to  three  per  cent,  of  the  capitalization  was 
sufficient  for  control. 

As  soon  as  those  in  control  of  the  management 
were  able  to  discern  which  systems  had  the  best 
prospects,  they  could  increase  their  holdings  at  very 
low  prices. 

Morgan,  commissioned  by  his  clients,  the  English 
bondholders,  reorganized  the  bankrupt  roads  east  of 
the  Mississippi,  leaving  those  west  of  the  river,  except 
the  Northern  Pacific,  to  the  above-described  group 
of  great  capitalists.  In  every  case  he  required  from 
the  hopeless  holders  of  almost  worthless  stock  abso- 
lute dictatorship  through  the  "voting  trust,"  which 
meant  the  power  of  voting  all  the  stock  until  the 
roads  would  be  able  to  pay  dividends.  He  combined 
the  roads  into  large  systems,  which  thus  formed  a 
monopoly  in  his  hands. 

The  improvement  in  the  efficiency  of  the  roads 
under  concentrated  control  and  their  increasing 
prosperity  caused  a  flow  of  money  to  New  York, 
where  it  was  distributed  by  their  masters  among 


Concentration  of  Money  Capital     291 

already  existing  banks  and  trust  companies  which 
thus  came  under  the  control  either  of  Morgan  or  the 
Standard  Oil-City  Bank-Kuhn  Loeb  group,  or  among 
new  institutions  founded  by  them,  respectively. 
These  railroad  funds  on  deposit  in  New  York  in 
their  turn  furnished  additional  means  for  the  further 
concentration  of  industry. 

The  turn  of  the  century  came  to  be  another 
important  milestone,  as  had  been  1879,  in  the  devel- 
opment of  monopoly.  Competition  in  the  manu- 
facturing industries  had  led  to  a  state  of  affairs 
similar  to  that  which  had  previously  existed  in  the 
transportation  industry.  The  time  had  come  for  a 
general  movement  toward  their  monopolization. 
The  most  conspicuous  case  was  that  of  the  steel 
industry  which  was  threatened  with  ruinous  com- 
petition and  was  consolidated  by  Morgan,  himself 
retaining  the  supreme  power  in  this  trust,  the  same 
as  he  had  done  in  the  reorganized  railroads.  With- 
out his  approval  no  director  in  this  great  corporation 
can  be  named.  ^ 

The  manifest  advantages  of  combination  and  high 
capitalization  encouraged  imitation  even  by  indus- 
tries which  had  not  yet  felt  too  severely  the  pinch  of 
competition. 

Heretofore  the  house  of  Morgan  had  not  been  a 
prom.oting  concern,  its  chief  business  having  been  the 
sale  of  bonds  to  its  European  clients,  whose  interests 
it  subsequently  represented  in  the  railroad  bank- 
ruptcies. The  reputation  acquired  by  Morgan  in 
this  performance  made  him  now  the  public  institu- 

'  See  Report  Congressional  Committee  (Pujo  Committee),  p.  134. 


292  Capital  To-Day 

tion  for  combining  and  financing  trusts.  Industries 
applied  to  him  for  consolidation  in  numbers  increas- 
ing year  by  year.  The  issuing  business  of  the  house 
grew  to  such  proportions  that  its  own  resources  be- 
came insufficient  for  carrying  the  necessary  mass  of 
securities,  no  matter  how  excellent  its  facilities  were 
for  their  speedy  turn-over. 

At  this  juncture  Morgan  effected  an  alliance,  joint 
account,  or  general  community  of  interest  with  Baker, 
whose  First  National  Bank  had  continued  to  be  the 
leading  dealer  in  securities  in  the  domestic  market 
and  possessed  resources  not  much  inferior  to  those 
of  the  City  Bank.  Its  business  had  been  exceedingly 
profitable.  The  average  annual  profits  for  twenty 
years  have  been  about  1500%  on  the  capital  originally 
invested  in  1864,  viz.,  $500,000,  and  a  $100  share 
of  that  original  stock  has  now  come  to  represent 
a  market  value  of  $20,000.  Another  alliance  was 
formed  by  Morgan  with  James  J.  Hill,  a  man  of 
considerable  banking  influence  in  his  empire  in  the 
Northwest,  as  well  as  in  New  York. 

All  the  great  banks  and  trust  companies  had  now 
been  brought  into  the  fold  of  either  one  or  the  other  of 
the  two  groups.  Between  these  antagonism  continued 
and  burst  forth  in  the  attempt,  in  1901,  under  the 
active  leadership  of  Kuhn,  Loeb  &  Co.,  to  wrest 
control  of  Northern  Pacific  from  the  Morgan-Hill 
group.  These  had  considered  themselves  safe  in 
the  control  of  15%  of  the  stock,  but  the  enemy 
quietly  bought  20%  and  then  called  on  Morgan- 
Hill  to  surrender.  But  the  real  battle  had  only 
begun  then  for  obtaining  a  majority  of  the  stock, 


Concentration  of  Money  Capital    293 

which  finally  reached  a  price  of  $1000  for  each 
share, — a  terrible  sacrifice  for  each  party,  almost 
precipitating  a  financial  panic.  Peace  was  arranged, 
the  costly  experiment  was  never  to  be  repeated,  and 
as  a  guaranty  of  future  harmony  between  the  two 
groups,  members  of  each  entered  the  other's  banks 
and  trust  companies  as  directors. 

It  was  fortunate  that  the  groups  came  to  an  un- 
derstanding. The  overcapitalization  of  the  trusts 
founded  in  this  period  exercised  before  long  a  great 
strain  on  the  money  of  account.  The  overrated 
shares  declined  tremendously,  and  the  severe  panic 
of  1907  was  the  result.  For  their  protection  the 
two  groups  stood  together  as  one  man,  and  the  out- 
come of  the  panic  was  their  complete  cementing 
into  a  single  power,  controlling  the  industries  of  the 
country. 

The  evolution  of  scattered  into  concentrated 
capital  must  not,  however,  be  understood  as  al- 
together a  process  forced  by  economic  necessity  or 
according  to  a  rigid  economic  formula.  History 
has  its  laws,  but  it  finds  no  ready  rut  to  move  in. 
The  fulfillment  of  its  purposes  has  often  been  accele- 
rated by  crimes.  To  be  sure  this  fact  is  not  pleasant 
to  contemplate,  but  our  ethical  sensibilities  cannot 
change  the  stuff  of  which  history  is  largely  made. 

Thus  when  bankruptcy  of  railroads  and  other 
industries  did  not  come  along  readily  enough  for  the 
desired  concentration,  other  means  were  used  to 
bring  about  this  consummation.  Hear  what  the 
Pujo  Committee  says': 

*  Report,  part  iii,  chap.  3,  sec.  11. 


294  Capital  To-Day 

.  .  .  within  the  past  thirty  years  the  bulk  of  our  rail- 
ways have  gone  through  insolvency  and  receivership. 
The  proceedings  are  sometimes  instigated  by  the  man- 
agement through  a  friendly  creditor  (and  are  then  gener- 
ally collusive  in  their  inception)  or  through  the  trustee 
for  bondholders  .  .  .  one  or  more  of  the  officers  under 
whose  administration  insolvency  was  brought  about, 
or  their  nominees,  is  made  a  receiver.  .  .  .  Neither 
creditors  nor  stockholders,  who  are  the  parties  really 
interested,  are  notified  or  have  an  opportunity  to  be 
heard  either  on  the  question  of  insolvency  or  of  the 
personnel  of  the  receivers.  The  stage  has  been  set  in 
advance  ...  a  self-constituted  committee  is  announced, 
frequently  consisting  of  men  well  known  in  the  financial 
world,  .  .  .  selected  by  a  leading  banking  house.  This 
committee  in  due  course  presents  aplanfor  thereorganiza- 
tion  of  the  property.  If  the  security  holders  do  not  like 
it,  their  only  alternative  is  to  form  another  committee, 
if  they  can  arrange  to  combine  their  scattered  forces  and 
find  .  .  .  the  banking  house  .  .  .  who  can  finance  the 
cash  requirements  of  these  colossal  transactions  in 
hostility  to  the  banking  house  that  was  first  in  the 
field.  .  .  .  It  is  well-nigh  impossible  to  find  rival  banking 
houses  to  lead  the  opposition.  The  usual  outcome  has 
been  that  the  defenseless  security  holders  take  whatever 
plan  is  offered,  however  unjust,  as  against  the  alternative 
of  being  entirely  wiped  out.  There  have  been  rare 
exceptions,  before  the  power  of  these  banking  houses 
became  irresistible,  when  the  security  holders  have 
wrung  concessions  through  revolt.  .  .  .  Generally,  after 
years  of  delay,  the  property  is  put  through  the  form  of  a 
sale,  but  there  is  no  bid  except  that  of  the  committee. 
...  If  a  security  holder  has  failed  to  deposit  with  the 
committee  he  gets  nothing.  ...  No  constituted  author- 
ity supervises  the  vast  expenses  he  is  required  to  pay. 


Concentration  of  Money  Capital     295 

The  bankers  and  the  committee  are  made  the  sole  judges 
over  that  and  on  every  other  conceivable  question, 
including  their  own  commissions  and  charges.  .  .  . 

The  report  adds  that  Morgan  &  Co.  and  Kuhn, 
Loeb  &  Co.  secured  domination  in  that  way  of  the 
following  railroad  systems:  Baltimore  &  Ohio — 
Chesapeake  &  Ohio — Cincinnati,  Hamilton  &  Dayton 
— Chicago  &  Great  Western — Erie — Northern  Pa- 
cific— Pere  Marquette — Southern — Reading — Union 
Pacific — and  that  the  same  abuses  exist  in  the  so- 
called  industrial  corporations  (as  distinguished  by 
the  committee  from  railroads). 

In  the  face  of  such  facts  the  following  extract  from 
an  address  by  John  Skelton  Williams,  Controller  of 
the  Currency,  at  Raleigh,  S.  C,  on  May  13,  1914, 
scarcely  merits  the  New  York  Times'  characterization 
as  a  "fancy  picture."     Mr.  Williams  said: 

New  York  has  become  the  commercial  capital  of  the 
country,  the  great  citadel  of  the  money  power,  the  reser- 
voir of  money  supply.  It  is  the  walled  city  from  which 
the  barons  have  levied  tribute  on  a  territory  and  popula- 
tion vaster  than  any  Lord  or  King  of  the  Middle  Ages 
dreamed  of,  yet  sometimes  using  methods  ruthless  and 
savage  as  those  of  the  fiercest  of  the  robber  nobles — 
forays  and  levies  devastating  by  scientific,  artful  methods, 
pillaging  under  form  of  law,  smiting  with  swords  which 
bite  deep,  although  we  cannot  see  them,  consuming  with 
fire  which  comes  invisible  and  unsuspected.  The  simile 
seems  strong,  but  is  justified  by  facts. 

No  sudden  swoop  by  a  feudal  magnate  on  his  peaceful 
neighbors  was  a  more  cruel  or  shameless  plundering 
expedition  than  some  of  the  transactions  which  have 


296]  Capital  To-Day 

been  brought  to  light  by  which  the  shareholders  of  the 
railways  and  other  great  enterprises,  established  to  build 
up  the  country  and  to  promote  the  public  interests,  were 
despoiled.  Their  property  and  money  were  taken  from 
them  by  the  might  of  masses  of  money  working  stealthily. 
The  raids  had  none  of  the  attractions  of  the  picturesque 
or  the  merit  of  courage.  They  were  cold-blooded, 
relentless  seizure  of  other  men's  goods  by  plots,  treachery, 
and  betrayal  of  trusts  which  should  have  been  held 
sacred. 

If  the  Pujo  Committee  and  Controller  Williams 
have  spoiled  the  halo  of  sanctity  which  the  average 
citizen  is  made  to  believe  encircles  the  heads  of  the 
munificent  Morgan  and  of  the  benevolent  Jacob  H. 
Schiff  (head  of  Kuhn,  Loeb  &  Co.),  the  Interstate 
Commerce  Commission  has  added  its  own  estimate, 
not  alone  in  this  respect,  but  also  in  another.  In  its 
report  to  the  United  States  Senate  anent  the  financial 
breakdown  of  the  New  Haven  Railroad  system,  the 
commission  refers  to  "the  indefensible  standard  of 
business  ethics  and  the  absence  of  financial  acumen 
displayed  by  eminent  financiers  in  directing  the  desti- 
nies of  this  railroad."  The  three  most  "eminent 
financiers ' '  on  the  New  Haven  board  were  Morgan, 
Baker,  and  William  Rockefeller.  How  their  over- 
reaching themselves  in  capitalizations  brought  on  the 
1907  panic  has  already  been  referred  to.  This  at 
first  threatened  to  swamp  them,  although  in  the  end 
it  resulted  in  further  concentration,  as  every  crisis 
has  done. 

The  now  absolutely  unified  money  power  is 
organized  along  lines  indicated  in  the  Pujo  Committee 


Concentration  of  Money  Capital     297 

report,  which  we  here  follow   principally,  as  being 
the  most  authentic  source : 

First:  The  inner  group,  J.  P.  Morgan  &  Co.,  the 
recognized  leaders  and  official  capitalizers  of  monopolies, 
George  F.  Baker,  and  James  Stillman.  They  control 
leading  banks  and  trust  companies  with  resources  in 
excess  of  $1,300,000,000,  besides  a  number  of  smaller, 
but  important,  financial  institutions,  and  of  course  their 
personal  fortunes. 

Second:  The  wholesalers  of  securities.  Related  to 
the  primary  group  practically  as  partners  in  many  of 
their  large  enterprises.  They  are  principally  "private 
bankers ' '  who  have  not  grown  as  great  as  Morgan,  such 
as  Kuhn,  Loeb  &  Co.,  Lee,  Higginson  &  Co.,  Kidder, 
Peabody  &  Co.  In  Chicago  the  inner  group  deals 
mainly  with  the  First  National  Bank  and  the  Illinois 
Trust  &  Savings  Bank. 

Third:  The  retailers  of  securities.  Banks  and  bankers 
throughout  the  country,  hundreds  of  them.  They 
circularize  or  canvass  by  solicitors  every  possible  investor. 
Some  of  them  do  a  business  of  hundreds  of  millions  of 
dollars  a  year. 

This  is  the  machinery  for  the  distribution  of 
fictitious  capital.  It  employs  many  persons,  but 
the  control  of  the  country's  industries  rests  in  the 
hands  of  the  inner  group  who  must  necessarily 
consult  with  the  Rockefellers,  because  of  their  great 
fortune  which  increases  by  scores  of  millions  every 
year. 

The  issuing  houses  of  the  Money  Trust,  having 
stood  sponsor  at  the  organization  of  some  great 
industrial  combination  and  offered  its  securities  to 


298  Capital  To-Day 

the  investing  public,  assume  an  important  responsi- 
bility, not  so  much  toward  the  latter  as  in  relation  to 
their  own  interests.  The  success  or  non-success  of 
the  corporation  reflects  on  the  prestige  of  the  issuing 
house  and  affects  its  ability  to  place  future  flotations 
of  other  corporations.  It  is  therefore  necessary 
that  it  continue  its  sponsorial  relationship  to  the 
corporation  by  being  represented  on  its  board  of 
directors  and  by  acting  as  its  sole  fiscal  agent.  This 
intimate  and  permanent  relation  is  advantageous 
to  both  sides. 

To  the  industrial  corporation  it  assures  the  financial 
support  and  expert  guidance  of  financial  kings  who 
hobnob  with  real  kings  and  their  prime  ministers, 
who  command  the  most  authoritative  information, 
and  who  are  thus  able  to  judge  of  the  world's  political, 
industrial,  and  financial  condition,  as  no  simple 
capitalist  can.  The  connection  further  vouchsafes 
the  corporation  freedom  from  the  possibility  of  com- 
petition, for  the  Money  Trust,  represented  by  the 
issuing  house,  can  afford  it  such  protection,  being  not 
only  in  possession  of  the  great  reservoirs  of  money, 
but  sufficiently  influential  to  prevent  the  financing 
of  any  enterprise  not  approved  by  it. 

To  the  Money  Trust  the  connection  assures  the 
deposit  with  one  of  its  banking  institutions  of  the 
cash  funds  of  the  corporation.  These  amount  in 
some  cases  to  tens  and  scores  of  millions  and  are 
thus  strengthening  very  materially  the  system  of 
centralized  money  capital.  We  have  here  an  endless 
chain  of  cause  and  effect  working  in  favor  of  the 
!Money  Trust.     Through  its  power  it  gains  a  hold 


Concentration  of  Money  Capital     299 

on  the  industrial  corporations;  the  latter's  cash 
funds  then  become  a  very  material  element  in  the 
totality  of  the  money  which  the  trust  controls, 
thereby  again  adding  to  its  power.  Nor  are  the 
depositaries  of  the  industrial  corporations  subject 
to  the  surprises  which  come  to  the  ordinary  commer- 
cial banks  in  the  sudden  heavy  drawings  by  a  number 
of  their  large  depositors;  the  fiscal  agents  will  tell 
their  corporations  at  the  convenient  time  when  the 
latter  may  draw  heavily  on  their  deposits  or  apply 
to  the  money  market  with  new  issues  of  securities. 

The  Money  Trust  as  yet  evinces  no  desire  of 
being  an  absolute  monopoly,  any  more  than  do  the 
large  industrial  trusts.  It  permits  independent 
financing  of  local  or  small  enterprises,  when  these  do 
not  interfere  with  the  interests  of  the  existing  indus- 
trial corporations  which  are  under  its  guardianship. 
It  is  true  that  the  Money  Trust  does  not  directly  con- 
trol all  the  scattered  accumulations  of  money  in  the 
country,  yet  the  banking  institutions  which  hold 
the  same  would  not  risk  to  incur  the  displeasure  of 
the  magnates,  lest  they  should  cease  to  be  invited 
by  the  latter  to  participate  in  future  underwritings. 

"The  patronage  .  .  .  is  of  great  value  to  these  banks 
and  bankers,  who  are  thus  tied  by  self-interest  to  the 
great  issuing  houses  and  may  be  regarded  as  part  of  this 
vast  financial  organization.  Such  patronage  yields  no 
inconsiderable  part  of  the  income  of  these  banks  and 
bankers  and  without  much  risk.  .  .  .  The  underwriting 
commissions  .  .  .  are  usually  easily  earned  and  do  not 
ordinarily  involve  the  underwriters  in  the  purchase  of 
the    underwritten    securities.     Their    interest    in    the 


300  Capital  To-Day 

transaction  is  generally  adjusted  ...  by  the  payment 
to  them  of  a  commission.  Bankers  and  brokers  are  so 
anxious  to  be  permitted  to  participate  .  .  .  that  as  a 
rule  they  join  when  invited  to  do  so,  regardless  of  their 
approval  of  the  particular  business,  lest  by  refusing 
they  should  thereafter  cease  to  be  invited."^ 

The  Pujo  report,  which  argues  for  the  restoration 
of  the  defunct  competition,  by  legislation,  refers  to 
the  men  controlling  this  vast  system  as  "this  handful 
of  self-constituted  trustees  of  the  national  pros- 
perity."^ There  must  have  been  lingering  in  the 
recesses  of  the  committee's  memory  Baer's  letter 
already  quoted.  Also  the  committee  came  to  the 
conclusion  that  these  men  should  not  be  permitted, 
in  relation  to  the  money  held  by  our  banks,  trust 
companies,  and  life  insurance  companies,  "to  control 
and  utiHze  these  funds  as  though  they  were  their 
own." 3  That  this  social  development  is  so  logical 
that  the  scientific  mind  of  Marx  could  predict  it 
nearly  fifty  years  ago  would  have  been  news  to  the 
committee.  Here  is  the  passage  in  question: 
".  .  .  the  whole  enormous  extent  of  the  credit 
system,  in  fact  the  total  credit,  is  exploited  by  them 
[the  bankers]  as  their  private  capital."'* 

The  three  banking  institutions  with  which  the 
three  members  of  the  inner  group  are  more  directly 
connected,  J.  P.  Morgan  &  Co.,  National  City  Bank, 

'  Pujo  Committee  Report,  p.  132. 

'  Id.,  p.  161.  ^Id.,  p.  161. 

'•  "  Indem  die  ganze  ungeheucre  Ausdchnung  des  Kreditsystems, 
ucbcrhaupt  dcr  gcsamte  Kredit,  von  ihnen  [Bankiers]  als  ihr  Pri- 
vatkapital  exploitirt  wird.  " — Kcpiial,  vol.  iv.,  p.  15,  3d  edition. 


Concentration  of  Money  Capital     301 

and  First  National  Bank,  control  by  341  director- 
ships 112  corporations  having  aggregate  resources 
or  capitaHzation  of  $22,245,000,000.^  Control  of 
additional  corporations  by  directorships  is  exercised 
by  members  of  the  second  group. 

That  the  increasing  concentration  of  economic 
power  is  not  a  peculiarly  American  development, 
but  world-wide,  most  advanced  of  course  in  the  most 
progressive  countries,  the  United  States  and  Ger- 
many, is  shown  by  the  ojfficial  report  of  the  Austrian 
Consul  in  Berlin  made  in  1906.     He  said: 

"Never  before  was  economic  Germany  so  entirely 
under  the  absolute  rule  of  a  group  of  men,  barely  fifty  in 
number;  in  no  former  period  of  industrial  expansion  was 
the  old  saying  of  the  "free  play  of  forces"  abandoned  to 
such  an  extent  as  in  1906,  when  the  momentous  decisions 
as  to  the  extent  of  production,  sales  abroad,  prices,  the 
granting  of  credit,  the  raising  of  new  capital,  the  fixing 
of  wages,  and  the  rates  of  interest  lay  in  the  hands 
of  a  few  persons  found  at  the  head  of  the  large 
banks,  mammoth  industrial  undertakings,  and  great 
Kartells." 

The  machine  above  described  for  making  and 
distributing  fictitious  capital  is  in  reality  a  monopoly- 
making  monopoly,  governing  the  people's  most 
important  concern,  their  work  and  their  income. 
As  one  sphere  of  industry  after  the  other  becomes  ripe 
for  organization,  it  will  not  go  for  its  purpose  to 
Washington,  to  the  seat  of  government  of  an  econo- 
mically unconscious  state,  but  to  New  York,  where 

'  Pujo  Committee  Report,  Exhibit  134  B. 


302  Capital  To-Day 

on  the  comer  of  Wall  and  Broad  streets  is  the  seat 
of  the  only  power  in  the  land  that  can  help  it. 

This  machine  is,  however,  only  adapted  for  the 
original  distribution  of  new  issues  to  the  ultimate 
consumer.  That  the  latter  shall  be  able  to  preserve 
his  character  as  a  loan  capitalist  requires  the  existence 
of  ready  markets  for  the  conversion  of  fictitious 
capital  back  into  money,  namely,  stock  exchanges. 

These  institutions  are  popularly  thought  of  as 
places  of  iniquity.  Mr.  Thomas  W.  Lawson,  a 
successful  insider  who  ought  to  know,  confirms  the 
popular  estimate  of  the  stock  exchanges  and  calls 
them  the  greatest  gambling  hells  on  earth.  If  their 
ethical  status  is  so  low,  then  it  must  be  that  the 
social  system  to  which  they  are  indispensable  is  of 
an  equally  low  ethical  status. 

It  is  certainly  an  expensively  conducted  gambling 
hell.  Mr.  Lawson  tells  us  of  a  brokerage  firm  which 
has  25,000  miles  of  private  wires,  costing  over  $700,000 
a  year.  He  gives  some  details  of  expense  of  one  gam- 
bHng  shop  for  a  year,  totaHng  $800,000,  as  follows: 

Expenses  of  main  office  on  Broad  Street:  salar- 
ies, $140,000;  private  wires,  $60,000;  rent,  $25,000; 
$150,000  for  sundries,  meaning  the  usual  entertaining 
paraphernalia,  such  as  would  be  found  in  any  gam- 
bling hell. 

Plaza  Hotel  office :  salaries,  $12,500;  rent,  $17,000; 
sundry  expenses — rum,  cigars,  and  small  gambling 
outfits — $14,000. 

The  Hughes  New  York  Legislative  Investigating 
Committee  touched  on  some  of  these  phases  of 
brokers'  offices  as  follows : 


Concentration  of  Money  Capital     303 

Complaint  has  been  made  of  branch  offices  in  the  city 
of  New  York — often  luxuriously  furnished  and  some- 
times equipped  with  lunch  rooms,  cards,  and  liquor. 
The  tendency  in  many  of  them  is  to  increase  the  lure  of 
the  ticker  by  the  temptation  of  creature  comforts. 

Mr.  Lawson  says  that  not  infrequently  these 
houses,  after  paying  all  these  enormous  expenses, 
make  from  two  to  five  million  dollars  a  year.  A 
Wall  Street  gambling  house  must  deal  in  at  least 
4000  shares  a  day  to  pay  merely  expenses  of  $500 
a  day.  This  is  equivalent  to  a  business  in  a  year  of 
$120,000,000.  But  houses  of  this  size  may  do  from 
300  to  500  millions  a  year.  Larger  houses  may  do 
25  million  dollars  a  day. 

Of  these  transactions  the  Pujo  Committee  has 
this  to  say^: 

A  small  part  of  these  transactions  is  of  an  investment 
character  ...  a  far  greater  part  represents  speculation 
.  .  .  more  hurtful  than  lotteries  or  gambling  at  the  race 
track  or  the  roulette  table,  because  .  .  .  withdrawing 
from  productive  industry  vastly  more  capital ;  .  .  .  quota- 
tions of  securities  are  manipulated  without  regard  to 
real  values  and  false  appearances  of  demand  or  supply 
are  created;  .  .  .  the  facilities  of  the  New  York  Stock 
Exchange  are  employed  largely  for  transactions  pro- 
ducing moral  and  economic  waste  and  corruption. 

The  manipulation  referred  to  consists  mainly  in 
simultaneous  matched  orders  to  buy  and  sell,  giving 
an  appearance  of  activity  and  of  price  tendency. 
The   committee    also    complains   of    the   influence 

'  Report,  p.  115. 


304  Capital  To-Day 

which  the  Money  Trust  can  exert  on  the  prices  of 
securities  simply  from  its  control  of  call  loan  rates 
from  day  to  day,  at  least  to  the  same  extent  as  indus- 
trial trusts  control  commodity  prices  in  their  spheres. 
We  cannot  join  in  the  condemnation  by  the  Pujo 
Committee  of  the  "moral  and  economic  waste" 
produced  by  the  stock  exchange,  nor  concur  in  its 
proposals  for  reformation.  The  latter  are  mostly 
unenforceable.  In  so  far  as  they  are  enforceable, 
the  objection  to  them  is  that  they  would  interfere 
with — speculation  (or  gambUng,  to  use  Mr.  Lawson's 
expression). 

Speculation  on  the  stock  exchange  is  the  selling 
and  buying  of  titles  to  revenue.  It  differs  from  the 
selling  and  buying  of  commodities  in  that  the  latter 
is  a  life  condition  of  the  capitalist  system  of  produc- 
tion, the  process  by  which  the  profit,  the  sole  pur- 
pose of  production,  is  realized.  The  circulation  of 
the  titles  is  independent  of  the  productive  capital, 
a  merely  personal  and  private  transfer  of  property, 
without  effect  on  the  production  of  profit  or  on  its 
reaUzation  by  the  sale  of  the  commodities.  There- 
fore, while  profit  is  value  produced  by  the  working 
class  for  which  value  it  receives  no  equivalent,  the 
gains  or  losses  of  one  speculator  are  the  losses  or 
gains  of  another  speculator,  and  do  not  affect  the 
working  class.  The  matter  may  also  be  stated  this 
way,  that  inasmuch  as  the  workers  are  paid  normally 
the  value  of  their  labor  power,  profit  is  in  the  exist- 
ing order  nobody's  loss,  while  speculative  gain  must 
always  be  another's  loss.  The  poHtical  economists, 
who  do  not  know  the  source  of  profit,  are  unable  to 


Concentration  of  Money  Capital     305 

distinguish  it  from  the  speculator's  gain.  To  them 
both  are  equally  profits. 

The  investor  is  interested  in  increasing  profit.  To 
the  speculator  increase  or  decrease  of  profit  are 
matters  of  indifference;  what  he  is  concerned  in  is 
price  fluctuation.  His  gain  consists  in  the  price 
difference  between  what  he  can  sell  at,  having 
bought  previously,  or  what  he  can  buy  at,  having 
sold  previously.  His  estimate  of  the  value  of  a 
revenue  title  has  been  the  source  of  his  gain  or  his 
loss.  If  all  speculators  were  of  one  mind,  all  speculat- 
ing in  the  same  direction,  at  the  same  moment,  and  in 
the  same  volume,  there  would  be  no  gains. 

The  uncertainty  of  speculation  (except  for  the  big 
insiders,  the  scientificos,  the  wise-ones)  is  the  very 
life  principle  of  the  stock  exchange.  This  uncer- 
tainty may  bring  about  changing  moods  several 
times  during  a  day.  These  produce  changing  rela- 
tions of  demand  and  supply,  resulting  in  changed 
quotations;  every  change  of  quotation  induces  new 
speculation,  and  so  on  ad  infi?titum. 

Thus  it  is  the  function  of  the  speculators  and  the 
stock  exchange  to  provide  a  market  ready  every 
minute  to  convert  fictitious  into  money  capital. 

Put  to  the  test,  it  is  true,  the  stock  market  has 
often  failed,  as  in  1907,  when  it  was  no  more  possible 
to  get  money  for  revenue  titles  than  to  get  money 
out  of  banks.  The  conversion  of  fictitious  into 
money  capital  is  easy  when  there  is  no  great  need  for 
it,  and  difficult  when  the  need  is  pressing.  But  the 
argument  against  the  stock  exchange  in  this  regard  is 
no  stronger  than  against  the  banks.     Everybody  can 


3o6  Capital  To-Day 

convert  fictitious  money  into  real  money,  when 
there  is  no  pressure,  but  not  when  there  is. 

Stock  exchange  speculation  did  not  exist  in  the  pre- 
corporation  days  of  capitalism.  It  is  conceivable 
that  it  will  become  obsolete  in  the  perfect  monopoly 
epoch  of  capitalism  in  the  future.  But  in  the 
present  period  of  transition  it  is  one  of  the  many 
unavoidable  wastes  inherited  from  the  period  of 
competition  now  passing  into  history. 

The  mention  in  this  recital  of  the  names  of  half 
a  dozen  contemporaries  has  been  necessary  for  a 
better  understanding  of  the  social  changes  in  bringing 
about  which  these  men  had  so  conspicuous  a  part. 
Yet  they  were  only  the  tools  of  a  historic  epoch  in 
which,  within  a  short  span  of  time,  matured  what 
capitalist  society  had  been  long  in  preparing.  The 
rapid  increase  in  the  private  fortunes  of  a  few  thou- 
sand magnates  is  now  assured  and  automatic  and 
every  census  will  show  the  effect  in  increased  industrial 
concentration.  These  leaders  will  pass  away,  but 
the  central  money  power  organized  by  them  will 
continue  to  exist  and  pursue  its  mission  of  clearing 
the  way  to  a  higher  social  order. 


CHAPTER  XIII 

THE  UNIFIED   CAPITAL  AND   CONCLUSION 

THE  outcome  of  competition  has  been  conditions 
of  threatening  or  actual  bankruptcy.  The 
outcome  of  such  conditions  has  been  monopoly. 
The  perfect  monopoly  is  therefore  the  ending  of  the 
phenomenon  of  bankruptcy. 

During  the  competitive  stage  of  capitalism  the 
planless  production  necessarily  resulted  from  time 
to  time  in  a  market  glutted  with  commodities  which 
their  producers  were  unable  to  buy.  The  outcome 
was  the  industrial  crisis.  Under  monopoly  there 
may  be  also  fluctuations  in  the  supply,  due  to  natural 
causes,  such  as  the  varying  supply  of  raw  materials, 
but  overproduction  of  commodities  due  to  ignorance 
of  conditions,  secretiveness,  or  even  positive  mis- 
leading as  to  the  state  of  production,  will  have  ceased, 
and  with  it  one  of  the  causes  of  crises. 

During  competition  there  was  no  possibility  of 
adjustment  between  the  money  turned  into  means 
of  productive  consumption  (especially  fixed  capital) 
and  that  turned  into  means  of  individual  consump- 
tion. The  consequence  was  a  deadlock  between 
these  two  divisions  of  industrial  capitalists,  resulting 
in  the  industrial  crisis.     The  industrial  trust  is  a 

307 


3o8  Capital  To-Day 

notice  to  all  the  world  that  the  constructions,  machin- 
ery, etc.,  in  its  sphere  are  sufficient  for  all  demands. 
The  monopoly  thereby  removes  this  important 
cause  of  the  industrial  crisis. 

During  competition  lenders  and  borrowers  met  as 
separate  interest  groups.  This  dualism  often  left 
the  lender  in  a  dubious  frame  of  mind  regarding  the 
continued  solvency  of  the  borrower,  especially  when 
there  were  indications  of  economic  or  political 
disturbance  in  some  part  of  the  world.  "Capital  is 
timid  "  (when  only  a  few  per  cent,  per  annum  were  at 
stake),  was  the  stock  phrase  of  its  scribes,  and  they 
never  tired  in  warning  other  people  not  to  frighten 
capital.  In  refusing  to  lend,  the  money  capitalists, 
acting  as  individual  persons  or  concerns,  precipitated 
the  crisis. 

Monopoly  does  away  with  the  dualism  of  lenders 
and  borrowers.  The  social  money  capital  takes  the 
form  of  revenue  titles  created  by  a  central  power 
which  controls  all  industries  in  the  interest  of  the 
owners  of  the  titles.  Industrial  capital  and  money 
capital  become  one.  Their  dualism,  as  a  cause  of 
crises,  disappears. 

The  credit  system  is  an  outgrowth  of  the  function 
of  money  as  means  of  deferred  payment.  Credit 
and  instruments  of  credit,  the  whole  credit  system, 
disappear  when  the  various  industries  are  merely 
departments  of  the  same  concern.  The  relations 
of  the  departments  with  each  other  and  with  the 
main  office  are  matters  of  bookkeeping. 

vSo  long  as  competition  survives  to  any  consider- 
able extent,  the  striving  for  a  higher  than  the  average 


Unified  Capital  and  Conclusion     309 

profit  rate  is  an  economic  necessity  for  the  individual 
capitalist  whose  economic  survival  depends  on  the 
success  of  his  striving.  The  tendency  of  this  striving 
is  to  eliminate  the  individual  functioning  industrial 
capitalist,  and  to  concentrate  every  industry. 

This  process  completed,  the  central  power  has  no 
reason  for  permitting  the  continuation  of  unequal 
profit  rates.  On  the  contrary,  it  is  interested  in  a 
perfectly  uniform  profit  rate  for  all  capital  in  order  to 
unite  the  class  it  represents  and  to  avoid  the  breed- 
ing of  a  rebellious  spirit  in  the  working  class  in  con- 
sequence of  extortion  by  monopolies  producing 
indispensable  necessaries  of  life. 

The  establishment  of  a  uniform  profit  rate  has  the 
further  effect  of  rendering  meaningless  the  multi- 
plicity of  denominations  of  fictitious  capital.  All 
varieties  of  shares  and  bonds  may  as  well  be  refunded 
in  shares  of  the  universal  capitalist  corporation,  in 
principle  merely  the  extension  of  the  present  idea  of 
the  holding  company. 

When  uniform  titles  to  income  have  supplanted 
shares  and  bonds,  when  fictitious  capital  has  been 
modified  into  plain  certificates  of  class  privilege,  the 
curtain  falls  over  the  portals  of  the  stock  exchanges. 

Capitalist  society  is  then  one  universal  stock 
company  in  which  the  profit  share  of  each  capitalist 
is  determined  with  exactness.  Thus  is  realized 
what  has  been  the  aim  of  competition,  but  what 
competition  was  unable  to  accomplish  even  approxi- 
mately : — for  equal  capital  equal  profit ! 

The  industries  are  then  socially  organized  and 
coordinated.      It  is  the  end  of  economic  anarchy. 


310  Capital  To-Day 

During  the  reign  of  this  anarchy  a  thing  of  value, 
as  the  socially  recognized  equivalent  of  every  product, 
had  been  a  necessity.  Only  by  money  could  the 
social  worth  of  the  individual's  labor  be  attested. 
Now  there  is  only  one  producer,  the  universal 
capitalist  corporation,  accountable  only  to  itself. 
It  does  not  produce  commodities,  it  does  not  pro- 
duce for  a  market,  it  does  not  exchange  its  products 
with  other  capitalists,  it  only  produces  use-values  for 
direct  consumption. 

These  use-values  are  delivered  to  the  capitalists 
and  workers  against  the  surrender  of  consumption 
certificates  which  have  supplanted  money. 

The  prices  of  these  use-values  are  not  the  economic 
expression  of  the  relation  of  a  thing  to  things,  but 
an  arithmetical  result,  regulating  distribution  by 
persons  to  persons.  Money  has  fulfilled  its  aim — the 
establishment  of  a  regulated  society. 

Society  has  evolved  into  an  oligarchy — consisting 
of  a  very  small  minority  of  the  people,  the  capitalists, 
enjoying  class  privileges  based  on  ownership  of  the 
means  of  production,  and  an  immense  majority,  the 
workers,  whose  labor  power,  however,  ceases  to  be 
a  commodity  selling  at  the  market  price,  inasmuch 
as  there  exists  no  market.  The  compensation  for 
labor  is  no  longer  regulated  by  an  economic  law,  but 
by  arbitrary  agreement  depending  on  such  factors 
as  power  and  discretion. 

Such  would  seem  the  outcome  of  a  logical  sequence 
of  economic  causes  and  effects.  It  is  by  no  means  a 
prophecy.  Our  concern  is  with  the  science  of  eco- 
nomics, the  processes  of  the  capitaUst  system  of  pro- 


Unified  Capital  and  Conclusion     311 

duction  and  its  tendencies.  Were  we  to  indulge  in 
prophecy,  we  should  indeed  be  inclined  to  say  that 
none  of  the  logical  developments  above  deduced  will 
ever  be  reached.     And  for  several  reasons : 

First,  it  is  not  the  method  of  history  to  wait  until 
conditions  are  rotten  ripe  before  replacing  outworn 
social  systems  by  new  ones. 

Secondly,  the  progressive  socialization  of  produc- 
tion develops  social  consciousness  which  finds  expres- 
sion through  the  state.  The  contradiction  between 
the  democratic  state  and  the  plutocratic  power 
within  the  state  calls  for  settlement.  An  antago- 
nism of  classes,  so  barefaced  and  extreme,  cannot 
be  envisaged,  in  spite  of  its  logic,  as  coexisting  with 
political  equality. 

Thirdly,  the  financial  mechanism,  already  pre- 
carious and  becoming  more  so  v/ith  each  year,  is 
subject  to  the  sudden  vanishing  of  the  social  faith,  on 
which  alone  it  rests.  Its  breakdown  would  intercept 
the  progress  of  capitalistic  monopolization  before 
reaching  its  final  and  logical  goal. 

If  the  social  insolvency,  which  is  covered  in  ordi- 
nary parlance  by  the  word ' '  credit , ' '  cannot  be  denied, 
then  we  shall  be  confronted  sooner  or  later  with  the 
tremendous  convulsion  of  social  bankruptcy  which 
is  to  give  birth  to  a  new  society.  Nothing  will 
avail  against  this  final  outcome  of  a  long  process  of 
evolution — no  paper  money  "based  on  the  credit 
of  the  nation,"  whatever  hallucination  this  phrase 
of  the  American  greenbackers  may  have  covered ;  no 
bi-metallism  at  any  ratio  whatever;  no  federal  re- 
serve acts ;  no  transfer  of  the  banking  business,  with 


312  Capital  To-Day 

all  its  assets  and  liabilities,  to  the  state ;  no  collection 
of  all  the  gold  of  a  country  into  a  single  reservoir, 
to  be  kept  there,  as  in  a  fortress,  out  of  danger  of 
exportation;  no  decree  threatening  penalties  for 
paying,  or  offering  to  pay,  a  premium  on  gold;  no 
other  scheme  which  might  be  broached  by  some 
imaginative  mind — the  will  and  purpose  of  no  man, 
or  set  of  men,  or  of  all  men,  will  avail  to  preserve  the 
life  of  the  passing  form  of  society,  the  commodity- 
producing  society.  It  cannot  live  without  the  free 
exchange  of  commodities,  a  single  one  among  which 
must  be  in  the  equivalent  form  of  value. 

History  can  never  overestimate  the  importance  of 
the  part  played  in  human  progression  by  the  yellow, 
glittering  metal.  If  we  could  attribute  purpose  to 
nature,  we  would  now  be  in  a  position  to  say  that 
gold  had  been  placed  by  nature  into  the  hands  of  man 
as  a  tool  for  the  erection  of  an  edifice  in  which  was  to 
dwell  a  race  emancipated  from  physical  care  and  thus 
free  to  devote  its  mental  gifts  to  the  highest  aims. 
But  in  all  animate  nature  the  advance  from  lower 
to  higher  forms  of  existence  is  replete  with  tragedy. 
Cruel  is  its  basic  law — the  struggle  for  existence. 
This  struggle  is  about  to  be  eliminated  within  the 
human  species  to  survive  solely  as  a  struggle  for  its 
mastery  over  nature. 

In  conformity  with  nature's  general  method, 
human  progression  has  led  through  a  vale  of  tears  and 
sorrows.  The  golden  tool  became  the  master  of  the 
workman,  setting  the  pace  for  him,  driving  him 
pitilessly  and  relentlessly  toward  the  completion 
of  a  task  he  understood  not.     The  fateful  gold  ruled 


Unified  Capital  and  Conclusion     313 

giants  and  dwarfs,  gods  and  men.  Now  the  wave  is 
rising  which  will  sweep  away  the  Ring  of  the  Nibe- 
lung,  stripped  of  power,  cleansed  of  blood,  its  natural 
character  restored — that  of  being  a  mere  thing  of 
beauty  and  guiltless  dehght,  mere  Rheingold. 


THE   END 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

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'      C  '             • '  ""_ 

J  ItttKK 

